When interest rates drop, homeowners should investigate whether home mortgage refinancing is right for them. Refinancing to a lower rate can save borrowers thousands of dollars and make a considerable cut into the monthly mortgage payment. However, in most cases, borrowers must consider the fees associated with refinancing and decide if refinancing will ultimately save them money.
Before You Apply
Deciding whether to pursue mortgage refinancing may be easier than being approved for a loan. Borrowers must remember that the lowest rates are awarded to those who have the cleanest credit rating and steady income.
Before you apply, scrutinize your credit report. Your credit rating is based on your debts compared to your assets and any black marks which include delinquencies, bankruptcies or foreclosures. The more infractions on your report, the lower your score. Borrowers will often find errors on their report such as credit resolution not reported to the bureau in a timely manner or financial activity from another person being reported to their file. Correct inaccuracies and request the revised copy of your report to ascertain your updated credit score.
Crunch the Numbers
Borrowers should shop lenders to determine which rates and fees are the best fit. Some lenders offer special promotions with no closing costs, but at a slightly higher rate, whereas others will have the rock bottom rate, but associated fees. Crunch the numbers based on your credit score, the equity in your home and the loan amount. Compare and contrast the benefits and drawbacks of refinancing to either a 15 year versus a 30 year product. The 15 year product will typically have a lower rate, but higher monthly payments.
To determine if you will save money in the long run, add the closing costs to the amount you would pay based on the new rate. Your credit score will help you determine how low of a rate you should be able to obtain (typically borrowers with scores over 650 receive the lower rates). If you are unsure, ask your lender exactly which rate you qualify to receive. The lender may ask you to complete a pre-qualification application first, which should only take you approximately 10 minutes.
Apply for the Refinance
Once you've decided on a lender and have a refinance rate in sight, conduct due diligence on the lender. Although sub prime lending isn't as popular today as it was several years ago, you want to ensure you are borrowing from an FDIC approved, reputable lender. One way to ensure your lender is on the up and up is to refer to the FDIC, CUNA (if you are financing through a credit union) website or the Better Business Bureau. A quick check can save you time, money and headaches.
Being prepared with all the paperwork will help the refinance go smoothly and avoid missing out on the low rate due to hiccups in the process. Overall, be sure you actually save money in the long run before you apply for a refinance. While rates may look enticing, you must decide if a home mortgage refinance will be financially advantageous.
Gina Ragusa is a freelance writer and mom from sunny (and sometimes not) South Florida. Her 15 year experience ranges from writing about banking to tattoo parlors. Read more about her adventures at http://blog.wahm.com/