10 things to consider before refinancing

This is the first of a 5 part series.

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  1. What type of loan are you in?
  2. What type of loan are you looking for?
  3. How long do you plan to stay in your home?
  4. What will the closing costs be?
  5. Will you be paying off debt?
  6. Do you need cash out?
  7. Are there benefits?
  8. Do you know your credit score?
  9. Do you like and trust your lender/broker?
  10. Are you ready to pull the trigger if it makes sense?

 

  1. What type of loan are you in?

You have to understand the loan that you’re currently in before you can understand the benefits of a potential refinance.  Over the last several years, many people have not truly understood their current loan situation.  A prepayment penalty may not have been explained to them, they are in an adjustable rate loan and did not realize it or perhaps the homeowner was put into a complicated, negative amortization loan.  Talk with a broker or lender that you trust and have them look into your current mortgage.  This is a good idea for everyone that has a mortgage loan. You don’t want any surprises next month or even a few years down the road.  Know your situation before you get started.

  1. What type of loan are you looking for?

You cannot start to shop for a loan if you do not know what you are looking for.  There are many loan programs still available with many different terms.  You may need to answer the questions that follow before you can understand what type of loan is best for your situation. But it is critical that you know exactly what you’re looking for.  This will prevent you from being persuaded into a loan that you do not understand and may not be in your best interest. It will guarantee that you get exactly the type of loan that will work best for you and your family.  Once you understand your situation, do some research and talk with more than one professional about the different mortgage products that are available. You might get differing opinions but it is imperative that you get educated if you expect to get the very best deal for yourself.

  1. How long do you plan to stay in your home?

This is obvious.  If you will only be in your home for one year it may not make sense to refinance at all unless you can do so with very little or no cost whatsoever.  If you plan to live in your home for the rest of your life then it probably does not make sense to get into a short-term adjustable rate loan.  These are obvious examples but there are some more complicated decisions.  If you plan to stay in your home for 5 more years does it make sense to get into a 5 year ARM?  Perhaps a 7 year ARM would limit some of the risk but it may even make sense to get into a 30 year fixed rate depending on market rates and your particular situation.

  1. What will the closing costs be?

This is a critical piece to the puzzle.  Your savings from a refinance will generally be partially offset by closing costs.  So how long will you need to stay in your new mortgage to recover the closing costs?  Does it make sense pay the closing costs compared to the savings?  This question will require some clear answers from a broker or lender before you can make an educated decision.  www.FreeHomeRefi.com eliminates the need for this question by connecting you with a lender that will not charge you closing costs other than title and appraisal (in some cases).

  1. Will you be paying off non-mortgage debt?

Debt consolidation can be a great reason to refinance.  Take a long hard look at all of your debt to determine the interest rates that you’re paying.  You can create additional cash flow each month and reduce(non-deductible) interest exposure by paying off debt with your mortgage.  Rolling your debt into your mortgage can have two long term benefits, a lower interest rate than you are currently paying and much lower payments that you are currently making.  Debt consolidation usually results in the most beneficial form a refinance and is one of the most underutilized tools that you have with your mortgage.

  1. Do you need cash out?

Cash out refinancing can be used for absolutely anything; however I would not recommend it for absolutely anything.  You can take cash out of your home to pay for college, start a business, payoff debt, buy a car or even take a vacation.  Taking cash out of your home is a very serious decision that requires some serious deliberation.  If you have a financial advisor, this is why you have them.  Discuss the possibilities with them and understand your long term goals before taking cash out of your home.  If you have a trusted mortgage broker or lender then you can certainly discuss your options with them as well.  A vacation may not be a great reason to take cash out of your home but if your total financial picture allows for it than it is certainly not a bad thing and it is much better than taking a vacation on your credit cards.

  1. Are there benefits?

This is a complex question and very well could be the last question that you ask yourself.  If you are in an adjustable rate mortgage and you plan on staying in your home forever then there are almost certainly benefits.  If you are paying off high interest debt then there are almost certainly benefits.  The problem arises when you don’t truly understand your current situation and you also don’t truly understand the loan that you are refinancing into.  This is when it gets blurry.  It may seem like a good idea at the moment but you have to keep the big picture in mind.  Where will this refinance leave you in 5, 10 or even 50 years?  If your home loses value (which many have recently), will you be able to look back and say that you benefited from a refinance?

  1. Do you know your credit score?

Your credit score can dramatically affect the interest rate that you are able to obtain with a refinance, and it may affect your ability to refinance at all.  Credit scores are becoming increasingly important to banks and lenders because of the recent sub-prime crisis.  When you go into the process knowing and understanding your credit score than you can have a better idea of what to expect.  Get a copy of your credit report and see if there are any errors and/or any simple ways to improve your score prior to a refinance.  Many folks have blemishes on their credit report that they don’t even know about.  Paying down some credit cards may dramatically increase your credit score as well.  Know and understand your credit score and credit situation prior to your refinance. Many career mortgage professionals can help you correct errors on your credit report and increase your score as part of the loan process. Be very cautious about paying a credit repairs service hundreds or thousands of dollars to perform these services.

  1. Do you like and trust your lender/broker?

This is extremely important.  You will be dealing with your lender/broker for the next 30 days minimum during the loan process. And the loan process today is filled with challenges.  Sometimes things go very smoothly and there are no hiccups.  More often than not there will be some problems and your lender/broker will seem more like a spouse over the next month or two.  There are still bad lenders/brokers out there who don’t know what they’re doing or who aren’t focused on your best interests.  There are many horror stories of homeowners that were misled, or did not receive proper disclosure and explanation so they didn’t understand the loan that they ended up closing.  There are also many instances where the closing costs change when the homeowner goes into signing.  Often times, people don’t even realize that they were charged much higher closing costs than they were originally told.  At the same time, there are several great lenders/brokers out there.  Trust is a difficult thing so do some homework and make sure that you like the person that you are working with.  This rings true for many folks that have gone through the refinance process in the past.

  1. Are you ready to pull the trigger if it makes sense?

This is perhaps the most important question of all.  Are you ready to pull the trigger?  If you answer yes to this question then read no further.  If you cannot answer yes then there are several factors at work.  Is the benefit not great enough?  Are you trying to time the market? (anyone that can time the market retired a long time ago and can pay cash for their house, so lets assume that you cannot time the market)  Are you always slow to act?  My point is simple: don’t waste time doing the research, get your ducks in a row and find a lender/broker that you like and trust.  The previous 9 questions mean nothing if you are not ready to pull the trigger.  If you have determined that there is benefit then you need to move forward, it really is that simple.  If you move through this process and determine that there is not currently a benefit but there would be if rates drop, setup a rate watch with your lender/broker.  When rates drop to that level they can call or email you at that very moment and you can lock in that interest rate.  Be proactive.  Be educated.  Think long term.