The Fed intends to keep interest rates low for 2013, which means that if you haven’t already joined the refinancing parade, you still may be able to jump in the line and score a lower interest rate. This could help reduce your monthly bill and help you build equity in your home faster.
But just because you can take advantage of these rates doesn’t mean you should. Here are some tips to determine your eligibility for refinancing and to get through the process without regret.
Refinancing Might Benefit You, if You….
Do it early on in your mortgage
In the later years of your mortgage, more of each payment applies to your loan principal, which helps you build equity and pay off the total bill more quickly. Refinance early in the mortgage when a higher percentage of your monthly payment goes toward paying interest.
Owe a lot
People who have a high loan balance will benefit more than those who don’t owe much, because the closing costs for a refinanced mortgage can outweigh the savings. But owing too much can be a bad thing. As a rule of thumb, homeowners need to have an 80% loan-to-value, or LTV, ratio to refinance. (Find out your LTV: Determine the amount you still owe on your mortgage, then estimate your current home value on Zillow, then divide the first number by the second.) If you owe more than your house is worth, you are probably ineligible for a refinance.
Plan on staying put
Refinancing isn’t free. The monthly savings you gain may exceed the costs of refinancing if you plan on moving within three years. Find out what your closing costs and your monthly savings will be. Then divide closing costs by savings to get the number of months it will take to break even.
Have good credit
Mortgage lenders will evaluate your current income, assets, debts and credit score, along with the current value of the property, to determine your eligibility for refinancing. If you’ve lost your job or if your credit score has worsened since you first got your mortgage, they might decide to give you a higher interest rate on a new loan. Check your credit score at least a month before your lenders do. That will give you time to address any issues you might find. And do not open a new credit card account or use your cards excessively in the days leading up to your closing day. Lenders often check credit right before that day, and those activities could hurt your score.
Shoot for the stars
Refinancing takes time and effort, so seek out the biggest reduction in interest that you can find to make the endeavor worthwhile. A rate at least one percent lower than your current rate will result in substantial savings.
Get Ready to Refinance!
Know the fees
A refinance is essentially a new mortgage, so you will have to pay all the closing costs that you did the first time around. Costs vary by state and by lender, but expect to pay about 3 to 6 percent of your remaining principal in refinancing fees, on top of other expenses.
Collect necessary documents
You’ll need proof of income, a list of your monthly debts (such as home equity loans, credit card balance, auto and school loans), savings account statements, income tax returns and a credit report.
Exhibit patience
Take time shopping for a low rate and for high-quality service. Get quotes from at least three lenders and consider the interest rate, closing costs and prompt, courteous service. Have patience once you’ve chosen a lender, too. Lenders today are more conservative and parsimonious than ever, so expect the process to be slow. Then, if everything gets wrapped up early, you will be pleasantly surprised.
Good luck!
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