Make sure the information is accurate: compare account numbers to make sure they’re yours, and look for inaccurate account histories. Dispute any information you think is incorrect; either by filling out a form on the agencies’ websites or by writing a letter.

Banks are constantly changing their criteria for lending money, so it can’t hurt to shop around for the best refinance rate. But there are two reasons you might want to consider sticking with your current lenders. The first reason is that it might be faster, particularly if there’s a lot of refinancing activity, as there can be when rates drop sharply.

Lenders who are overwhelmed with applications may be quicker to respond to borrowers who are keeping their loan in-house. They may not be in such a hurry to help borrowers who wants to payoff their loan and take their business somewhere else.

The second reason to consider staying with your current lender is if you are happy with the way your current loan is being serviced. This is particularly true if your lender is a local institution that services its mortgages in-house. Bigger regional or national lenders are more likely to sell a loan – and the servicing rights – so there’s no guarantee you’ll be dealing with the same company even if you stay with your current lender.

Points Please

Refinancing comes with some of the same tradeoffs as purchase loans. Chances are, when you took out the original mortgage to purchase your home, the lender offered you the opportunity to ‘buy down’ the interest rate by paying one or more ‘points,’ an amount equal to 1% of the loan amount. You’re likely to be presented with the same kinds of options when you refinance, and trade-off is the same: the more points you pay, the lower the interest rate on the loan (and vice versa).

As a rule of thumb, if you’re planning to stay in your home a long time, this may be a good investment. But if you’re not sure how long you’ll be in your home, or you just want to keep the closing costs as low as possible, choose the zero-point option.

And as with a purchase loan, the rate you are quoted when you apply to refinance may no longer be available once all of the paperwork is completed. So you’ll have to decide whether to lock the rate in, for a fee, or take the risk that prevailing market rates might move higher in the interim. Rate locks are typically available for 30 or 60-day periods. Of course, if you do lock a rate in, you run the risk of missing out if rates move lower.

If you can’t get a refinance loan, or if you’re not sure whether it’s worth the cost, there are some other options, assuming you have the means. Borrowers who don’t have enough equity in their homes may want to consider putting additional money down in order to qualify for a mortgage.

And if you can’t stomach the closing costs, consider over paying down your mortgage a little each month. Anything extra you send in with the payment coupon will automatically be used to pay down the principal, reducing your future interest costs.

Say you took out a $250,000, 30-year mortgage with a fixed rate of 8% a couple of years ago, but you can now get a similar loan with an interest rate closer to 7%. To refinance, you take out a new loan with a lower rate and use the proceeds to pay off the old loan. Your monthly payment will fall by about $170 a month, saving you over $2,000 a year.

Another reason to refinance is to avoid an expected increase in the monthly payment on an adjustable-rate mortgage. Many adjustable-rate mortgages actually charge a fixed rate of interest for an initial period of between one and 10 years before the rate starts resetting. Sometimes this initial interest rate is set artificially low to entice borrowers. Once the interest rate starts resetting at prevailing market rates, the monthly payments can jump, making them harder to afford or even unaffordable.

By taking out a new mortgage, either another adjustable-rate loan with an initial, fixed-rate period or a fixed-rate loan, and using the proceeds to pay off the original adjustable-rate loan, you can keep your monthly payments from rising too much.

Even if you can’t get a better interest rate than the one on your current loan, you may be able to lower your monthly payments by stretching the payments over a longer period of time. Most mortgages today have 30-year terms, but it’s possible to find a 40-year loan. And if you have a 15-year mortgage, you may be able to lower your monthly payments by refinancing into a 30-year loan. While banks charge higher refinance rates on longer loans, you’ll be paying off less of the principal each month. The net result could be a lower monthly payment.

While most people refinance to lower their monthly payments, it’s also possible to save money over the long-term by refinancing into a shorter-term loan. This will raise your monthly payment, but it should get you a lower interest rate, all things being equal. And since you’re paying the loan back faster, you’ll pay less interest over the life of the loan.

You could cut the amount of interest you pay over the life of the loan in half. For example, if you take out a $150,000, 30-year mortgage with a fixed rate of 8%, and stay inyour home until the mortgage is paid off, you will pay a total of $2446,232.87 in interest. That’s right – you’ll be paying more in interest than you are actually borrowing.

By comparison, if you take out a 15-year loan of the same size with the same interest rate, you’ll pay $108,016.06 over the life of the loan. But your actual savings are likely to be even higher, since banks typically charge less interest on shorter-term loans.

Brian Brady, a principal at. World Wide Credit Corp., a mortgage broker based in San Diego, said that historically, banks have charged around half a percentage point less on 15-year loans than on 30-year loans.

Cashin’ In

Refinancing also allows you to cash in on an increase in the value of your home. This is much less common than it used to be, since housing prices have been falling for the past couple of years. But there are still some people who purchased their home 10 or 20 years ago and have accumulated a lot of equity in the property, either because the property has appreciated or because they’ve paid off a big chunk of the mortgage. They may be able to get a new, bigger loan, pay off the old loan and have cash left over.

Freddie Mac estimates that homeowners with loans owned or guaranteed by the finance company cashed out about $32 billion in home equity in the fourth quarter of 2008 and the first quarter of 2009. While that sounds like a lot, it was the lowest amount cashed out over two consecutive quarters in the past eight years.

For starters, refinancing costs a lot. You can expect to pay most, if not all, of the closing costs you would pay for a purchase loan. That includes fees charged by the bank and mortgage broker as well as fees for an appraisal, title insurance, and credit report, among others. The total could easily reach several thousand of dollars.

Even if you’re reducing your monthly payment by several hundreds of dollars, it may be a year or more before you offset the money you’ll have to bring to the table when the loan closes. You need to make sure the payoff occurs relatively quickly.

So it’s important to consider how long you expect to live in your home. If you’re planning to sell in the next couple of years, refinancing, even with low refinance rates, may not be worth the trouble. (You may be able to “roll” the closing costs into the new mortgage, but you’ll be paying interest on the additional money you borrow for years to come.)

Some  mortgages, particularly those made to riskier borrowers, come with penalties for paying them off early, although there are fewer and fewer of these. So-called subprime loans typically penalized borrowers for selling or refinancing in the first two or three years of the loan, and most lenders stopped making these loans in late 2006 or early 2007. So most of these subprime loans are already more than two or three years old – and no longer subject to the prepayment penalties.

Do You Qualify?

Another pitfall to refinancing: you may not qualify. As this article is written in July 2009, banks are stuck with a lot of bad loans on their books, and they’ve become much pickier about who they will lend to and on what terms. You may not qualify for the best rates anymore.

These days you need a credit score of at least 740 to qualify for the best mortgage rates -  those on loans backed by Fannie Mae or Freddie Mac. Brian Brady, a principal at World Wide Credit Corp., a mortgage broker based in San Diego, said you qualify for a loan backed by one of these companies with a score as low 620, but the pricing is “tiered,” with the interest rate banks can offer falling, at intervals of 20 points or so, for better scores.

“It’s risk-based, so the better your credit, the lower the rate will be,” he said.

You also need to have some equity in your home, which isn’t a given these days. Home prices have fallen so far and transactions are so few that it can be difficult to come up with an accurate valuation, or at least one that’s acceptable to your lender.

If listings in your local market are dominated by foreclosed properties, this could negatively affect the appraisal of your property, even if it is in pristine condition. As a rule, you can’t refinance a loan that’s for more than 80% of the value of your house.

However, there are new government programs for borrowers who have little or no equity in their homes. Borrowers whose loans are up to 97% of the value of their homes may qualify to refinance with a mortgage insured by the Federal Housing Administration.

And the Making Home Affordable program allows borrowers with conforming loans owned by Fannie Mae or Freddie Mac to refinance if their current mortgage is as much as 125% of the current value of their home.

But if you want to refinance a loan bigger than $417,000, you may be out of luck. So-called “jumbo loans,” those too big to qualify for purchase by Fannie Mae or Freddie Mac, are pretty hard to find these days, although the limits on the size of loans Fannie and Freddie has been raised to as high as $729,750 in some high-cost markets like New York and San Francisco.

– This article was written in July 2009