Do you want to refinance your home, but feel unsure about whether it's a smart decision? Well, your concerns are warranted because navigating the loan process can be difficult if you're not prepared for potential obstacles.
In fact, Frank Donnelly, president of Mortgage Bankers Association of Metropolitan Washington, says homeowners should refinance with caution.
"You definitely have to have your ducks in a row," Donnelly says. "It's still a tight credit environment, and the documentation requirements are very stringent, no matter how well-qualified you are in today's market."
Want to see what else mortgage experts have to say about refinancing? Check out some tricks of the refinancing trade we've gathered from mortgage experts.
Trick #1: Know Why You're Refinancing
There is a reason pro sports teams hold countless team meetings before they go into battle. Without a solid game plan, they hurt their chances of coming out on top.
The same is true for homeowners who are thinking about refinancing, according to Craig Goebbel, government affairs chairman for the Washington Association of Mortgage Professionals.
Goebbel says one of the first things homeowners should consider when thinking about refinancing is whether their current monthly mortgage payment is causing them financial stress. If so, a well-executed refinance plan could pay off in monthly savings.
The Federal Reserve Board's website says your choices of refinancing game plans could include:
- Extending the remaining loan term, which is the period of time it takes to pay back a loan. This could enable a homeowner to lower monthly mortgage payments.
- Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. By locking in a set interest rate, the borrower could eliminate fluctuating loan payments.
- Reducing the term of the mortgage from 30 years to, for example, 15 years. This could increase monthly payments, but reduce the number of payments and the amount owed in interest.
- Utilizing your home's equity (the dollar-value difference between the balance you owe on your mortgage and the value of your property) to create something known as a "cash-out" refinance. A new loan repayment plan would be established and the cash difference, based on the amount of equity, would go to the borrower in a lump sum payment that could be used for any specific need, such as paying for remodeling or starting a tuition fund.
Trick #2: Understand Your Credit Score
If there is one factor that can cause equal amounts of agony and ecstasy for homeowners who want to refinance, it's their credit score, which is used to determine a borrower's credit worthiness and ability to pay back a debt, according to Bill Burnett, president of the Virginia Association of Mortgage Brokers.
"Credit rating is everything on a mortgage," says Burnett, who adds that a credit score of 740 and above is great for refinancing hopefuls. A score in the 680 range and below, however, could make it difficult to refinance a home, causing the borrower to pay higher interests rates and fees.
Burnett says homeowners who want to refinance should rectify any discrepancies or possible errors on their credit report in order to make sure they have an accurate score.
To get started, you'll probably want to note that the three major credit reporting agencies that provide credit ratings for individuals are Trans Union, Equifax, and Experian, according to the Federal Deposit Insurance Corporation's website.
Trick #3: Track Property Values
Nobody likes a snoopy neighbor, but that's exactly what you need to be if you're thinking of refinancing.
Why? Because "Your home is only worth your neighbor's home," says Denver-based mortgage broker, D.J. Davenport. "Comparable homes sold within a neighborhood, if they are like yours or similar, is a very good dictator of your home value. So, keep your ear to ground and eyes open."
And it's a good idea to know your home's value when refinancing because if the value has depreciated, and you owe more than the home is worth, then you'll likely pay a higher interest rate when you refinance, says Burnett.
When a homeowner owes more for a home than it's worth - a situation known as being "upside-down" on a loan - the road to refinancing can be a bumpy one.
"If you're upside-down or you don't have a lot of equity, it weighs against you," says Davenport. "Tracking your property value will dictate whether you get refinanced and whether you made a good investment."
Trick #4: Ask Lenders a lot of Questions
Don't be afraid to probe the mortgage lenders who are in control of your refinancing destiny.
"If you are shopping around, ask questions," Davenport says. Just think about it, if you don't ask questions, how else will you truly understand if refinancing is the right option for you?
To help get the question and answer session started, the Federal Reserve's guide to mortgage refinancing offers some key refinancing questions to ask your lender:
- What type of mortgage is it - fixed-rate, adjustable-rate, FHA, VA, other?
- What is the loan term (length of loan)?
- What is the contract interest rate or the starting interest rate?
- Can the balance you owe on the loan rise?
- Does the loan payment include escrow or reserve for taxes and insurance?
- What is the estimated total monthly payment (principal, interest, taxes, insurance, PMI)?
- What are the estimated fees and other settlement (closing) costs?
When you have the answers to these questions, you'll hopefully have a better idea of whether or not you'll be able to benefit from refinancing. And if it's still not clear, consider asking more questions and doing more research.
Trick #5: Make Use of a Mortgage Calculator
You may not have liked math in high school, but you're going to have to get comfortable with it if you're planning to refinance. Well, you'll at least have to get comfortable with a calculator.
Why? Because plugging in your current loan information - like loan amount and loan term - into a mortgage calculator can help you assess whether or not you can afford to refinance your home, says Davenport.
And the more refinancing homework you do, the better.
"Going into refinancing, you should never go in blindfolded and trust somebody else," Davenport says. "Know what you want and know what the payments could be and what the rates are."
So, after you've used a mortgage calculator to determine potential payments and rates, Goebbel says it might be helpful to compare results with those of a mortgage professional to see how well your calculations turned out.
The bottom line: You want your refinancing to be as cost-efficient as possible.
Trick #6: Watch for Red Flags
Homeowners who do some homework before refinancing might be better prepared to spot red flags as they deal with lenders and mortgage brokers.
Some popular flags to watch out for include:
"No-cost refinance": Burnett says promises of sealing a refinancing deal without closing costs is most likely a bait-and-switch tactic. The truth, Burnett says, is that lenders and brokers who offer this deal might be getting the homeowner to bite on a higher interest rate, thus costing the homeowner more money over the course of the loan.
Pre-payment penalties: If a lender or broker mentions that you owe a pre-payment penalty for refinancing your home, there's a good chance you have a problem on your hands. Why? Because according to Burnett, "Most pre-payment penalties were on the adjustable rates or sub-prime loans with a high risk level."
Sub-prime loans, according to Burnett, refer to high-interest loans normally given to borrowers who might be considered default risks. These debtors often were subject to pre-payment penalties if they attempted to pay off the loans - or refinance - early.
To get the best results from your refinance experience, Burnett says homeowners should always be prepared and on the lookout for red flags.
More about refinancing on Yahoo! Homes:
• How to make the most of low refinancing rates
• Refinancing? Avoid these five mistakes
• Find the real costs of refinancing
• Ready to refinance? Avoid tricky nontraditional mortgages
• Reasons to refi before 2013
- Mortgage Calculator