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Refinancing, or applying for a new home loan to pay off your current home loan, is an attractive option for those unlucky borrowers whose adjustable rate mortgage sent their monthly home payments up, up, and away. However, even homeowners with fixed mortgages may want to replace their current loan with a more favorable one, raise money for home improvements, reduce monthly payments, or pay a loan off quicker. Refinancing, when done properly, can help. Here’s how to do it:

Set Clear Refinancing Objectives
Are you looking to lower monthly payments? Pay off your home sooner? Lower the overall cost of the loan? Defining objectives will help you figure out what type of loan you want and whether the current options are going to help you achieve that goal.

You may want start by reviewing the terms of your current loan, if you don’t already know them inside and out. Find out about the different types of mortgages on the market to understand the risks and benefits of each. For instance, if you want to lower your monthly payments to free up funds for something else, this may require you to extend the length of your loan, and result in an overall increase in costs.

Research and Compare Costs and Lenders
Refinancing requires many of the same steps that are involved in getting an original mortgage; it also comes with many of the same fees. The general rule of thumb is that if interest rates are two points lower than your current interest rate, it may be a good time to refinance. However, the costs associated with refinancing—closing costs, points, fees—all need to be factored in when comparing loan terms between lenders. Even if the interest rates are low, you may not save money once everything is factored in.

Ideally, you’ll shop around to three or more lenders, compare the overall costs and decide whether refinancing makes sense.

Here are some things to ask about in addition to the terms of the mortgage:

* Rates
Find out the current mortgage interest rates, whether or not these change weekly and whether they refer to fixed or adjustable mortgages.
* Points
Points are fees paid to the lender, sort of like a service charge. A point generally equals 1 percent of the loan; the amount of points you pay on a loan will vary with the interest rate. In general, low interest rates mean more points. Since it can be a sizeable amount of money (four points on a $200,000 loan is $8,000), find out how many points the lender is asking for at each interest rate.
* Fees
There are many. Broker fees, underwriting, transactions, closing costs—get a detailed list of all the fees the lender includes in refinancing and make sure the list is complete. Fees are sometimes negotiable.

Do the Math
Once you’ve gathered all the loan information, compare costs between lenders and with your current mortgage. This loan comparison chart can help organize the information. Remember that a lower interest rate will also result in less money you’re able to deduct on your income tax. If refinancing does save you money, or helps you achieve your objective, choose a lender. To keep your business, your current lender may offer a better loan term than what you found on the market. If you are unsure about your options, the U.S. Department of Housing and Urban Development offers non-profit counseling.

Apply for a Loan
You will have to fill out the Uniform Residential Loan Application, also known as the 1003, with a loan officer. To fill this out you will need to know the type of mortgage, property information, personal information like employment and monthly income, and information regarding credit and bank accounts.

Within three days of submitting your loan application, the lender must give you two documents:

* Truth in Lending, which details the loan, payment schedule, interest rates, finance charges, and fees of your loan
* Good Faith Estimate, which describes the amount of closing cost fees you are likely to have to pay

If you’ve already missed payments on your current loan, or racked up huge credit card debt that you’re hoping a refinancing will help you get out of, finding a new loan may be hard. However, as we’ve seen with the subprime lending scandal, there are some unscrupulous lenders on the market. Therefore, it pays to do the math and figure out if refinancing will put you in a better spot financially—or whether it’s worth the trouble at all.

By: Brie Cadman

This entry was posted on Tuesday, April 8th, 2008 at 8:40 am and is filed under FSBO. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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