Tips before finding a lender

As a borrower, you should do some research and preparation before moving forward with a lender. For a successful hunt remember these tips:

• Improve your credit score. The higher your credit score the better the loan terms you’ll be able to secure. If your credit score needs improvement, and you’re not in a rush to refinance, take some time to build your credit profile. The long-term savings will be more impressive.

• Monitor the market. Do you anticipate interest rates to increase or decrease? Does it make sense to secure a fixed rate or adjustable rate mortgage? Understanding how different refinance products fit with different economic conditions can help you secure the best loan possible.

• Speak to different lenders. Current mortgage rates and refinance products will vary from individual to individual and lender to lender. The best way to learn the best rate that you can secure is through talking to many different lenders and comparing your findings. Can you get a better deal than your current mortgage terms?

• Know the true cost of the deal. Interest rate and principal aren’t the only two figures that go into the true cost of a refinance. Closing costs and other ancillary fees will also add up. Do you have a prepayment penalty? Does refinancing mean you’ll need to secure PMI? Use a mortgage calculator to assess the true cost of your refinance from lender to lender to see how much you’ll save over the life of your loan.

FAQ about refinancing

Q: When is it a good idea to refinance?

A: Refinancing makes sense for homeowners that can lower their monthly payment, or change their current loan terms and pay their mortgage off faster. It typically makes sense to consider refinancing if market interest rates are about 2 percent lower than your current rate. Of course, there are exceptions to every rule. The best way to see if now is a good time to refinance your home is to use a refinancing calculator. Determine your savings each month, total closing costs for a refinance, and your break-even point to see if you will have ample time to reap the benefits of a refinance.
An ideal situation for refinancing might look something like this:

If you took out your purchase mortgage pre-2008, you might have something like a 9 percent loan. Current refinance rates are much lower. Let’s say you could refinance to around 5.25 percent on a 15-year fixed-rate loan. In this situation, you would end up with lower monthly payments and a shorter loan term. Refinancing would be a great choice.

Q: Is it less expensive to refinance through my current lender?

A: If you decide to refinance your home, it’s always wise to ask your current lender about special promotions for existing customers. Some banks offer a streamlined program that can help FHA borrowers bypass paperwork and home appraisals, while other institutions like SunTrust allows borrowers who have been customers for 3 or more years to skip closing costs all together. These extra incentives might make them the best option for your refinance, but not always. It’s still best to do your homework.

Q: How much of a finder’s fee should my mortgage broker get?

A: Mortgage brokers are a way to time-effectively shop multiple lenders and help find a loan that makes the most sense for you. This customer service comes at a price.

It is common to pay a fee to your mortgage broker. Usually a mortgage broker will be paid a fee from the originating lender, which may be lumped into your closing costs. Most mortgage brokers won’t be upfront about the compensation they receive until your loan application has been submitted. One way to get a sense of the fees and charges you might owe a broker – and additional closing costs- is through a Good Faith Estimate. This estimate should give you a good idea of how much the broker fee is, though the fee won’t be exact. The best way to see your true dues is on the HUD-1 or HUD-1A Settlement Statement.

Q: When does it make sense to do a cash-out refinance?

A: Cash-out refinances typically come with a lower interest rate than other equity loans like a HELOC or HEL. Cash-out refinances can help finance major purchases like home improvements or putting your child through college. They can also help borrower’s pay off higher-interest debt. When a borrower uses a cash-out refinance wisely, it can be a smart financial strategy.
The risks can be dire though, so it’s important to understand the implications should you default on your loan. With a cash-out refinance your home is the collateral. If you use a  cash-out refinance to enable bad habits like making frivolous purchases, it is not a wise financial decision. It’s also important to assess the new terms of your loan, closing costs and PMI could offset the benefits of a cash-out refinance.
Refinancing can be a complicated process. It’s wise to consult with a professional in the industry for personalized help.