If you are currently considering refinancing your home mortgage loan there are some questions you need to have answers to before you start shopping.
First, how long will you live in your home? This is important to know because if you only plan on staying in the house for a few years you may be able to save money with an adjustable rate mortgage loan. You should also make sure your mortgage doesn’t come with a penalty for early repayment if you have to move. If you’re unsure how long you’ll be staying in your home consider the average American today doesn’t stay in one place for more than seven or eight years.
Second, you need to understand the costs associate with refinancing your mortgage. These costs take the form of lender fees, appraisals, prepaid points, closing costs, and other miscellaneous fees. Make sure you get a good faith estimate of closing costs from your lender and read all the fine print. If you don’t understand the language used in the documentation don’t be afraid to ask for someone to explain it to you.
Third, figure out how long it will take you to recoup your expenses from refinancing. The whole point of refinancing your mortgage is to save money. You save money by lowering your monthly payment, lowering your interest rate, and getting more flexible terms from your lender. It is from these savings you can figure out how long it will take you to recoup your closing costs. If it’s more than five years to recoup those expenses it may not be worth your while
Next, decide how much risk you are willing to tolerate with your loan. If your comfortable speculating on market conditions and interest rates you may be able to save some money with one of the riskier flavors of adjustable rate mortgages such as option or interest only mortgage loans.
You will need to understand the lock period for the lenders you are working with. If it takes longer to close than the lock period your lender is offering you could lose your interest rate or some of the perks you may be getting in the form of terms.
Another good idea is to prepare a budget. It is important to know how much of a monthly payment you can afford. You also need to consider insurance, association fees, and property taxes when deciding how much you can afford. Don’t forget to budget savings into your plan. A disaster fund is an important part of home ownership as repair costs come at the most inopportune times.
Next, take an assessment of your credit history and make sure there are no errors in the report. Our guidebook has an excellent chapter on how to contact credit reporting agencies regarding discrepancies in your credit reports.
Finally, make sure your homeowner insurance policy is up to snuff for your region of the country. Don’t skimp on flood insurance if you live in area prone to floods. Also, make sure the contents of your home are also covered. Make sure you do this prior to closing on your new mortgage.