How to Shop for a Mortgage Refinance
Six steps to finding the right loan to match your circumstances
This article first appeared on HSH.com.
While the essential elements of shopping for a mortgage are the same for a home purchase or a refinance, the refinancing process usually starts with a decision to either improve your cash flow or change your debt profile, says Russ Anderson, a centralized sales executive with Bank of America in Los Angeles.
He says you should determine your goal for refinancing before you meet with a mortgage professional. Once you've decided whether you want to reduce your payments or pay off your mortgage faster, you can begin shopping for a lender and a loan.
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"The average consumer shops for a refinance like they're shopping for a flat-screen TV," says Barry Habib, chief market strategist for Residential Finance Corp. in Columbus, Ohio. Everyone's price conscious, he says, but not everyone does their homework to determine which product best suits their short- and long-term goals.
6 Steps to Shop for a Refinance
1) Start online. Deborah Ames Naylor, executive vice president of Pentagon Federal Credit Union in Alexandria, Va., recommends using a refinance calculator, which estimates your monthly payments at various loan terms.
"A shorter term loan will have a lower interest rate than a 30-year fixed-rate loan, but the monthly payment will be higher because you're paying it off faster," Naylor says. "It's important to decide what payment you're comfortable making before you see a lender, because that payment could be much less than the payment you qualify for."
2) Select the right length. Habib says the loan term you choose needs to be made in the context of your other financial obligations and plans.
"If you have $30,000 in credit card debt and no savings for college, you may want to go for a 30-year loan to keep the payments as low as possible," Habib says. "Someone else may want a shorter term to build equity faster, while another borrower might want a longer loan to keep the mortgage interest tax deduction as long as possible."
(MORE: Does It Make Sense to Get a 30-Year Mortgage at Age 66?)
3) Talk to multiple lenders. Research all the loan products available from credit unions, regional or community banks, direct lenders (who work directly with the homeowner, without a broker or middleman) and national banks to find out what special programs they offer, Naylor says.
"Many lenders offer 'portfolio loans,' ones they keep in-house instead of selling on the secondary market," she says. "They can be more flexible with those loans and offer special promotions."
Instead of basing your decision solely on current mortgage rates, Anderson says you need to find a lender you can trust. "People get too wrapped up in the rate rather than finding someone who will communicate with them," he says. "You need to find someone who will be engaged in your family's financial situation."
4) Look into your refinancing options. Discuss various loan products when interviewing lenders.
"There's a broad product mix of conventional financing, government-backed programs like FHA loans and special refinancing programs through the federal government’s Making Home Affordable program," Anderson says. "A good lender can present the pros and cons of each of these programs in the context of your individual finances."
(MORE: How Retirees Can Avoid Refinancing Troubles)
5) Decide how you'll finance your refinance. You can pay your closing costs and lender fees at closing, have them wrapped into your loan balance or opt for a "no-cost" refinance.
"A no-cost refinance means that your lender will pay the fees and you'll pay a slightly higher interest rate of one-eighth to one-fourth percent," Habib says.
HSH.com's mortgage refinance calculator can help you decide which option is best for you.
6) Compare mortgage rates and fees. Advertised mortgage rates are sometimes based on paying points; one point is equal to 1 percent of the loan amount. So make sure you contrast loans with zero points or the same number of points.
"It's important to compare all three things that factor into what your loan will actually cost: the interest rate, points and the loan origination fee," Naylor says.
According to HSH.com, these are the current average refinance mortgage rates (as of May 23, 2013):
- 30-year fixed-rate loan: 3.76 percent
- 15-year fixed-rate loan: 2.98 percent
- 1-year ARM: 2.91 percent
Mortgage rates vary daily and sometimes hourly, so it's best to compare rates on the same day.
While shopping for a refinance may take a little longer than refinancing with your current lender, the rewards can last as long as your loan.
Michele Lerner is a freelance writer specializing in articles about real estate, personal finance and business. She has written for Bankrate.com, HSH.com and The Washington Times, among others.
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