(originally published June 2009)
“Cut your mortgage payments in half!” “Refinance for free!” These offers are enticing, but if you “have to have it now,” you need to stop and ask yourself some tough questions: What is my monthly budget? How long do I plan on living in this house and how much will I save by refinancing?
Refinancing involves replacing a current loan with a new loan offering better terms and conditions. One of the most common reasons to refinance is to secure a lower interest rate. Lower interest rates will help you build equity faster and can decrease the size of your monthly payment.
Another reason to refinance is to adjust the length of your loan. Decreasing the length of your loan will increase your monthly payments but will lower the overall amount of interest you pay, saving you money in the long run. Increasing the length of your loan will have the opposite effect, lowering your monthly payment but increasing the amount of interest you pay. For homeowners struggling to make payments, increasing the length of the loan can provide temporary relief.
As a homeowner, you need to be prepared before you enter the refinancing process. The best way to be prepared is to evaluate your budget. This allows you to go into the lender’s office with “eyes wide open.”
According to the Indiana Builders Association, the first step is to figure out what you can actually afford on a monthly basis. When determining the monthly payment you can afford, remember that, in addition to the monthly principal and interest, you will also be paying into escrows for property taxes, hazard insurance and possibly a homeowners or condominium association assessment. You have more knowledge about your living expenses than a lender. Hold firm with that number and don’t be tempted to agree to a higher amount than what you are comfortable spending. Mortgage calculators are a great way to figure out what your monthly payments would be based on interest rates and down payment amounts.
The Independent Community Bankers of America offers the following suggestions to homeowners preparing to refinance their mortgage:
• Organize paperwork, such as pay stubs, W-2 forms, tax returns and bank and investment statements.
• Check your credit report and bring it to your lender or broker. Credit reporting agencies must give you one free credit report annually.
• Ask your lender or broker to carefully explain the refinance options available, including any rate adjustments, other loan features and fees so you aren’t surprised by initial or future payment increases. Don’t be taken in by promises of low payments or 100 percent financing.
• Request a written Good Faith Estimate to compare the real costs of your mortgage. It will tell you what your interest rate, monthly payment and closing costs will be.
In our next article, we will review refinancing options.
Use the refinance savings calculator to help determine if refinancing is right for you. Should you decide to refinance, make sure you are working with a qualified loan broker. Call the Indiana Securities Division at 1-800-223-8791.
- Search loan broker database
- Contact the Securities Division