Homeowners anxious to lower their mortgage interest rates are refinancing in record numbers, according to industry experts. While refinancing may save you perhaps hundreds of dollars off your existing mortgage, it is not for everyone. If you are considering refinancing, the Better Business Bureau suggests you shop around, compare prices and negotiate. But also move with caution when dealing with some lenders.
To help you decide if refinancing is for you and to help you prepare to approach a financial institution, the BBB offers these tips.
When you refinance your home, you simply apply for a new mortgage at the lower rate in order to pay off the old loan. This means that, for many lenders, you will again be required to pay most of the costs you originally incurred to get your first mortgage - loan application fees, title search, appraisal, credit check, lawyer's services, discount points (in many cases) and other finance charges. But, many institutions offer plans where most of these fees are folded into the loan, reducing your actual "out of pocket" cash to a minimum. Most consumers are able to take a tax deduction on the interest. Ask your tax advisor if this applies to you.
Before you go through the expense of refinancing, check the interest rates to make sure they have dropped to a level that makes refinancing worthwhile. Conventional wisdom states that a two or three percent difference between the rate on your current mortgage and the new rate over a period of time - generally several years - usually offsets the costs you must pay at closing. The ultimate amount you may save depends on many factors, including your total refinancing, whether you sell your home in the near future and the effects of refinancing on your tax situation.
If you decide to refinance, obtain information from several lenders. Knowing just the amount of the monthly payment or interest rate is not enough. Ask for information about the same loan amount, loan term and type of loan so that you can compare the information. Remember, you do not have to refinance your mortgage with the same lender that provided your original mortgage.
Also, be cautious of smooth-talking lenders that call you on the phone or come to your door offering easy credit, guaranteed low-interest loans or loan terms that sounds too good to be true. Fraudulent lenders often prey on people who are desperate for cash to pay bills, make home repairs or who do not understand the mortgage loan process. Their loan terms can include excessive fees, high interest rates and provisions that can make it expensive for you to get out of the loan. If a lender ask for an up-front fee before you can obtain the loan, look elsewhere. Be sure to check with the Better Business Bureau and your state attorney general for a reliability report on the lending institution (s) your are considering.
Once you know what each lender has to offer, negotiate for the best deal that you can. Have the lender or broker write down all costs associated with the loan. Be sure to read the loan documents carefully and be certain that all spaces are filled in before you sign them. Always assume that any document you sign is a contract. If you do not fully understand it, do not sign it!