If you’re planning to refinance, the first thing you should do is check your credit score and repair it, if necessary. Order reports from all three of the credit reporting agencies, Equifax, Experian and Transunion – you’re entitled to a free copy once a year.
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.
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