According to the Federal Reserve Board, there are three things to consider when determining whether refinancing your home is a good idea:
- How long you have already been paying your mortgage.
- How long you plan to remain in your home.
- Whether or not your current mortgage has a prepayment penalty.
When you have had your mortgage for a long time, more of your monthly payments go to paying off your principal. If you refinance, you will be restarting the amortization process, which means that your payments will mostly go towards paying interest and you won't be building much equity in your home. If you move out shortly after you refinance, the savings on your monthly mortgage payments may not be in force long enough to recoup the cost of refinancing. If your mortgage has a prepayment penalty, find out how much it is. High penalties can eliminate any savings you are hoping for.
Evaluate yourself as a loan candidate
Inaccuracies in your credit report should be corrected. One of the most important things to do before refinancing is to make sure you pay your mortgage payments on time, every time. Lenders are more likely to reject your application if your payments are late. You can check your credit score and read your credit report for free within minutes using MoneyTips' Credit Manager.
Shop for a lender
Start with your current mortgage company; it may offer you quite favorable terms just to keep your business. Check the Internet, local newspapers, and banks for the best deals and closing costs. You will also have to decide how you will pay for closing costs (cash vs. financing).
Get your documents in order
Refinancing requires you to have good credit and a history of being on time with your mortgage payments. You also have to document your income, assets, and bank accounts. Create a file that contains your last two months' pay stubs and statements for your checking and savings accounts. Self-employed homeowners will need tax returns for the last two years and financial statements. Your lender will verify your income and bank statements and evaluate your financial statements to determine if you are a good investment risk. You will also receive a list of any additional documents your lender will need.
Get an appraisal
A reliable appraisal is essential, especially if you have made home improvements. Internet searches can provide you with a fair idea of the values for comparable homes in your area. Getting an accurate value for your home is essential because it will determine your limits for refinancing your home.