This guest post comes to us from guest blogger Jim Wang. Jim writes about personal finance at Bargaineering.com.
This post is part of a special PerkStreet series about taking the next step to living in your dream home, whether you buy or rent.
Even if you’ve found your dream home, it might be even more dreamy after a refinance. With mortgage rates at historic lows, a lot of homeowners are thinking about refinancing. But how do you know if you should refinance? Should you wait? Will rates drop more? The answer comes down to your goals, your future plans, and what the numbers tell you to do.
Before you do anything, run the numbers through this refinance calculator from Dinkytown.net. You will need to guess at how much the refinancing will cost you, or ask a lender, as well as what your new interest rate might be (Wells Fargo publishes interest rates). The breakeven calculator will tell you how long until your interest and monthly payment savings pay for the refinancing. If you intend to be in the home for at least that period of time, refinancing is usually a good option.
Loan Modification
If you decide you want to refinance, then try getting a loan modification instead of a full on refinance. If the owner of your mortgage and the servicer of your mortgage are the same entity, this will be a cheaper and faster option than a full on refinance. If you can get a loan modification, also known as a contract modification, you avoid having to pay the settlement costs of the new loan.
Why would your mortgage lender want to do this? They’d much rather reduce your interest rate than lose the loan to a competitor. You still have to pay a fee, a much smaller fee, for the modification, so they are still earning a little extra revenue, but ultimately they get to retain the loan.
Clean Up Credit Report
If you can’t do a loan modification and the refinance still makes finance sense, request your credit reports (from AnnualCreditReport.com) and make sure everything is accurate and correct. If you intend to refinance within the next month, only correct the egregious errors that appear to negatively impact your score. Fix informational errors, like an erroneous address or misspelled account name, after the refinancing.
It also pays to give your FICO credit score a peek as well. If your score has taken a bit of a hit since you got the mortgage, you may not qualify for the best rates. You will want to know this before you start the refinancing process, which will likely decrease your score as lenders pull your credit.
Shop Around for Rates & Fees
Just as you did with your mortgage, it’s time to shop around for the best rates and lowest fees on your refinance. When you do, be sure to check back with your mortgage company to see what their rates are. Often times mortgage lenders will give you a break on a refinance if you refinance with them, especially if you have competing offers in hand. They may not agree to a loan modification, but they certainly want to be in the running to win your business back.
Refinancing doesn’t have to be a scary process and it really comes down to your plans and the money involved. The rule of thumb is that you should consider a refinance if current interest rates are a percent or more lower than your mortgage’s interest rate. Fortunately, with calculators, we can do much better than a rule of thumb, we can know for sure if a refinance is right for you.
