- It's important to know your refinancing goals. There are different types of refinances. The two main types include rate-and-term refinances and cash-out refinances. If your goal is to change your loan program, reduce your interest rate or change your amortization period, but you don't need more than $2,000 cash from your home's equity, then a rate-and-term refinance is probably a better choice. If you want to pay off other bills, obtain money for home improvements or just want more than $2,000 for any other purpose, then a cash-out refinance may be your best option.
- Talk to at least three to five lenders and ask for refinance quotes in writing.
- Once you receive the quotes, take time to compare them. Mortgage lenders provide their quotes on a uniform form called a good-faith-estimate (GFE). This document looks the same regardless of what lender it comes from. Section A discloses the mortgage lender or broker's fees. These fees include the lenders profit for obtaining the loan. They include any origination and discount points as well as any yield spread premium they receive from the lender in exchange for charging a rate higher than the wholesale cost. These fees and the interest rate are negotiable. Section B includes third-party fees required for the loan. These fees usually are not negotiable and the loan officer cannot make a profit on them.
- It's not just about choosing the lowest interest rate. Subtract the quoted mortgage payment from your current mortgage payment. Divide the closing costs by the difference. This calculates how many months are required to pay for the refinance. Do this with each quote. Estimate how long you expect to live in the home. Subtract the number of months you expect to live in the home from the number of months to pay off the loan and multiply the savings by that number. It will calculate the total savings of the refinance.
- Suppose that your current loan's payment is $1,000 a month. One refinancing lender offers a $800 payment with $4,000 in closing costs. Another lender offers a monthly payment of $850 and closing costs of $1,050. You know you will live in the home for five years, or 60 months. Loan No. 1 offers savings of $200 each month and takes 20 months to recoup the refinance costs. Loan No. 1 provides savings of $8,000 over five years. Loan No. 2 offers savings of $150 a month and takes seven months to recoup the costs. Loan No. 2 offers total savings of $7,950 over five years, making the refinance options almost equal. If you were only going to live in the home for three years, then loan No. 1 offers savings of $3,200, while loan No. 2 offers savings of $4,350. If you live in the home longer than five years loan No. 1 would clearly provide more value.
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