What you need to know to get your best deal on a refinance
You don't have to earn a finance degree or work in a bank to pull off a mortgage refinance, and you shouldn't have to spend hours studying and worrying about it to get a good deal. This quick-and-dirty guide will help you get it done and get back to your life.
Mortgage Refinance: 1, 2, 3
Refinancing a mortgage involves three simple steps:
- Assemble your documents and information
- Compare refinance options
- Choose a refinance lender
Refinancing: Just Because You Can Doesn't Mean You Should
Before you undertake these steps, you need to answer the question: "Should I refinance?" Here are some of the most common reasons to refinance.
- Pay less over the life of the loan
- Reduce your mortgage payment
- Trade home equity for cash
- Drop mortgage insurance coverage
- Get better loan terms
LendingTree's Refinance Breakeven Calculator is a great tool, because it shows you the difference between a new loan and your old one, and how long it would take for the savings generated to offset the cost of refinancing. It also compares the total interest expense of keeping your current mortgage with the total costs if you refinance.
Understand that unless you have an FHA or USDA home loan, you don't have to refinance in order to drop mortgage insurance. You can request cancellation in writing once the loan is at 80 percent of that value.
Finally, refinancing for cash out can be significantly more expensive than taking cash with a home equity loan. Compare both options before deciding.
Step 1: Documents and Information
There's no such thing as a "no doc" mortgage today, which means you'll have to document your income and assets when you apply for a mortgage refinance. Be prepared to supply two years of W-2s and two most recent pay stubs, or two years of tax returns and recent financials, if self-employed. To count any other income, like pensions or alimony, you'll have to prove that you receive it and that it will continue for at least three years.
You'll need statements for your investment, retirement and savings accounts. You should also know your credit score. Pull your report for free at annualcreditreport.com and purchase your scores, or get your VantageScore for free at LendingTree.
Step 2: Choose a Refinance Mortgage
There are many products available, and you'll want to narrow down your options before shopping for a mortgage. Here's what you'll need to consider:
- Timeframe -- how long do you plan to keep your home?
- Your goal -- lowest payment, least amount of interest, better terms?
- Your qualifications -- equity, credit rating and income
Ignoring your timeframe could be expensive. That's because interest rates for 30-year fixed mortgages are significantly higher than those of hybrid ARMs, which have introductory rates that are fixed for three, five, seven or ten years. Blindly paying for a 30-year rate when you're only going to have the loan for five years could cost you. For example, as of this writing, a 5/1 is available at 2.625 percent, while its 30-year fixed counterpart is at 3.625 percent. If you refinance $300,000, the difference between the two payments is $163 per month, almost $10,000 over five years!
Your goal is important as well. Suppose you want to pay less over the life of your loan. You can do this by getting a lower mortgage rate or by shortening your term -- perhaps from a 30-year to a 15-year loan.
Finally, your qualifications -- credit, equity and income -- determine what programs you can consider. If you have little or no home equity, you'll probably be limited to government programs like HARP, FHA, VA or USDA loans. If your loan amount exceeds limits set by the government or Fannie Mae, you'll be looking for jumbo financing. How do you know what's out there for people like you? Try LoanExplorer by LendingTree. Simply input your qualifications -- loan amount, home value and credit rating (click "more options" for VA eligibility, bankruptcy filings and more). You'll see real loan offers from LendingTree lenders -- tailored to your inputs.
Step 3: Find Your Lender
Now that you've chosen your program, it's time to find a lender. That decision revolves around two factors -- mortgage rates and service.
Comparing mortgage rates and terms is pretty easy, and it's very important. A Stanford University study found that people who obtained quotes from at least four lenders saved thousands in loan fees.
Contact several lenders and ask them for written mortgage quotes. Try to get your quotes simultaneously if possible, because rates change all the time. You can do this in person or by telephone, but it's easiest to do online. At LendingTree, for example, you can complete one simple form and get up to five custom quotes from competing lenders, or scroll through LoanExplorer (offers can be sorted by interest rate, APR and more).
Your quotes should list all costs and fees, so you can make an accurate assessment. The interest rate and APR (annual percentage rate) should also be prominently displayed. Once you have a few finalists, it's time to contact the lenders.
When you speak to your lenders, pay attention to the way they treat you. Do they answer your questions in an easily-understandable way? If they suggest a product, do they explain their reasons? Do they return your calls right away (or your emails / texts if that's your preferred method of communicating)? You can peruse lender reviews and ratings at LendingTree to get the benefit of other borrowers' experiences.
You're now ready to go. You've got your documents in order, you've chosen your lender and your program. The hard part's over for you, and the rest is up to your loan officer, underwriter, appraiser and title company.