For those who have resolved to take advantage of the great mortgage interest rates by refinancing their homes in 2013, be aware that navigating the loan process is more difficult than ever.
Frank Donnelly, president of Mortgage Bankers Association of Metropolitan Washington, tells Yahoo!Homes that homeowners should refinance with caution.
“You definitely have to have your ducks in a row,” Donnelly says. “It's still a tight credit environment, and the documentation requirements are very stringent, no matter how well-qualified you are in today’s market.”
Yahoo!Home gathered these tricks of the refinancing trade from mortgage experts:
Trick No. 1: Know why you’re refinancing
Homeowners need to consider whether their current monthly mortgage payment is causing them financial stress. If it is, a well-executed refinance plan could pay off in monthly savings, Yahoo!Home reports Craig Goebbel, government affairs chairman for the Washington Association of Mortgage Professionals, as saying.
The Federal Reserve Board’s website says the choices of refinancing game plans could include:
• Extending the remaining loan term to lower monthly mortgage payments.
• Switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage to eliminate fluctuating loan payments.
• Reducing the term of the mortgage from 30 years to, for example, 15 years, which could increase monthly payments but reduce the number of payments and the amount owed in interest.
• Take advantage of the home’s equity to obtain a lump sum payment for remodeling or a tuition fund or whatever the homeowner needs.
Trick No. 2: Understand your credit score
The credit score can cause both agony and ecstasy for homeowners who want to refinance, as lenders use it to determine a borrower’s credit worthiness and ability to pay back a debt, Bill Burnett, president of the Virginia Association of Mortgage Brokers, tells Yahoo!Home.
Burnett says a credit score of 740 and above is great for refinancing hopefuls, but a score in the 680 range and below could make it difficult to refinance a home, resulting in higher interest rates and fees.
Homeowners who want to refinance should rectify any discrepancies or possible errors on their credit report to make sure they have an accurate score, Burnett advises.
The three major credit reporting agencies that provide credit ratings for individuals are Trans Union, Equifax and Experian, according to the Federal Deposit Insurance Corporation’s website.
Trick No. 3: Track property values
When you’re looking to sell or refinance, your neighbor’s business is your business, because your home is worth only what your neighbor’s home is worth, according to Denver-based mortgage broker D.J. Davenport.
“Comparable homes sold within a neighborhood, if they are like yours or similar, is a very good dictator of your home value. So, keep your ear to ground and eyes open,” Davenport tells Yahoo!Home.
And if you owe more than the home is worth because it’s value has depreciated, then you’ll likely pay a higher interest rate when you refinance, says Burnett. When a homeowner owes more for a home than it’s worth – known as being “upside-down” on a loan – the road to refinancing can be a bumpy one.
“Tracking your property value will dictate whether you get refinanced and whether you made a good investment, Davenport adds.
Trick No. 4: Ask lenders a lot of questions
Don’t hesitate to ask questions of the mortgage lenders who are in control of your refinancing efforts.
Without the answers, how will you know whether it’s worth it to refinance?
The Federal Reserve’s guide to mortgage refinancing offers some key refinancing questions to ask your lender:
• What type of mortgage is it – fixed-rate, adjustable-rate, FHA, VA, other?
• What is the loan term (length of loan)?
• What is the contract interest rate or the starting interest rate?
• Can the balance you owe on the loan rise?
• Does the loan payment include escrow or reserve for taxes and insurance?
• What is the estimated total monthly payment (principal, interest, taxes, insurance, PMI)?
• What are the estimated fees and other settlement (closing) costs?
The answers to these questions will hopefully provide a better picture of whether you’ll benefit from refinancing. And if it’s still not clear, consider asking more questions and doing more research.
Trick No. 5: Make use of a mortgage calculator
Learning how to use a calculator will do you well as you begin the refinancing process. You’ll need to plug in your current loan information – including loan amount and loan term – into a mortgage calculator to help you assess whether you can afford to refinance your home, says Davenport.
The more you understand, the less likely you are to make a poor decision.
“Going into refinancing, you should never go in blindfolded and trust somebody else,” Davenport tells Yahoo!Home. “Know what you want and know what the payments could be and what the rates are.”
The bottom line: You want your refinancing to be as cost-efficient as possible.
Trick No. 6: Watch for red flags
Homeowners who do some homework before refinancing might be better prepared to spot red flags as they deal with lenders and mortgage brokers, including:
“No-cost refinance”: Burnett says promises of sealing a refinancing deal without closing costs is most likely a bait-and-switch tactic. The truth, Burnett says, is that lenders and brokers who offer this deal might be getting the homeowner to bite on a higher interest rate, thus costing the homeowner more money over the course of the loan.
Pre-payment penalties: If a lender or broker mentions that you owe a pre-payment penalty for refinancing your home, there’s a good chance you’re getting into an adjustable rate or sub-prime loan with a high risk level, Burnett says. Sub-prime loans refer to high-interest loans normally given to borrowers who might be considered default risks. These debtors often were subject to pre-payment penalties if they attempted to pay off the loans – or refinance – early.
To get the best results from refinancing, Burnett says always be prepared and on the lookout for red flags.
RE/MAX of Boulder, Inc