Refinancing Your Mortgage Without Tears

Have you seen today’s interest rates? You may be wondering if now is the time to refinance.

When is a Good Time to Refinance?

To answer that question, you have to answer a few others.

• Do you have a mortgage with an interest rate at least a half point higher than the current rate?
• Do you have equity of at least 10% to 20% in your home?
• Do you have a credit score of 720 and above – or a score that has improved substantially since you took out your mortgage?
• Do you have an adjustable-rate home loan?

Refinancing Considerations

If you answered yes to any of those questions, it’s time to at least look at a refi. The ultimate barometer of whether a deal will make sense for you will be, after you shop for a rate, whether you expect to stay in the home long enough to recoup the cost of the refinance.

Refinancing Example

I’ll let a quick example do the talking. Let’s say you have:

• $200,000
• 30-year fixed-rate mortgage
• 4.5% interest rate
• $1,013 monthly payment (excluding taxes and insurance)

Refinancing your home at:

• 3.66% interest rate
• $916 new monthly payment (savings of $97 a month).
• 2% ($4,000) typical refinancing costs

With the interest savings and the financing costs, you’d have to be in the home for 41 months to break even. If you’re not planning on staying that long, the deal isn’t worth doing. If you’re planning on staying longer, it may be worth pursuing.

Next Steps in the Refinancing Process

Here are some tips to make your refinancing as painless as possible:

Do Your Research

1. Rate Shop. Shopping around for the best rate almost always pays off.
2. Ask Your Current Lender. Don’t write off your current lender. Many lenders offer a discount to current customers who refinance with them.
3. Discounts. Find out if your current lender offers discounts, then compare their terms with the terms at other lenders.
4. “Streamlined Refinance” By sticking with your existing lender, you may also be able to get away with a “streamlined refi,” which is more of a loan modification than a complete refinance, which can save you a significant amount in closing costs.

Look at the Overall Costs

Consider your current mortgage and ask yourself the following:

• Have you had your mortgage for 15 years or more?
• Are you considering refinancing into a shorter-term loan?

Refinancing after 15+ years, your monthly payment will go down substantially. However, most of your payment is being applied to principal (for the first 15 years or so, the opposite is true – the bulk of your payment goes to interest). Refinancing, unless you do so into a shorter-term loan, may mean building less equity.

Watch Your Credit Score

Inquiries, like those that occur when you apply for a mortgage or car loan, can ding your credit score. But there’s a loophole in the formula that helps: If you confine mortgage loan shopping to 30 days, the credit bureaus will recognize that you’re shopping around for a loan and treat all the inquiries as only one inquiry.

Be Prepared to Wait

If you face hurdles – your credit score isn’t high enough, or you don’t have enough equity – know that you still have time to work on those problems and refinance down the line.

With Rebecca Cohen