By Geoff Williams, FrontDoor.com | Published: 2/02/2009
How long have I been at my job?
If the answer is less than two years, know from the outset that the hill you're about to climb is going to be steeper.
Why do I want to do this?
If you want to refinance in order to take cash out, experts generally agree: Now is not the time, especially in this economic climate. Mike Nosanov, a financial expert with JustAnswer.com, speaks for a lot of people when he says, "Don't 'cash out' in this market. Instead, only refinance if you can reduce your interest rate enough." In other words, you should only do this if refinancing is going to significantly lower your monthly payments.
What will I gain by doing this?
Typically, most experts agree to shoot for reducing your interest by at least one point; if someone tries to convince you that it's a financially wise move to spend thousands of dollars in closing costs to bring your 6.5 percent interest rate down to 6.25 percent, this is probably not someone who is looking out for you (run for the nearest exit). Nosanov also adds that you should only consider refinancing if you plan to be in your house at least another 18 months to two years, explaining: "It almost takes about that long for the monthly savings from the lower interest rate to offset the transaction costs of your refinance."
GIVE YOUR PAPERWORK A HUG
Embrace your inner accountant, because you're going to need to find every bit of paperwork that shows the worth of your house and what revenue you and, if you have one, your spouse are contributing to your budget. Locate the following documents to submit to your lender:
TAKE A LOOK AT YOUR CALENDAR AND BANK ACCOUNT
Granted, if you're going to refinance, you want to do it as soon as possible, in case rates go up. But at the same time, if you're planning a wedding that's going to happen soon, if your baby's due any week now or if this is just a really busy period in your life, remember that time doesn't stand still when you're refinancing.
"Most rate locks are only good for 30 days," says Neil Viotto, executive vice president of Mortgage Express LLC, in Cedar Knolls, N.J. "With the current market, underwriting now takes about 10 business days. Keep this in mind when trying to calculate a closing schedule."
That's not the only thing you should be calculating. As the rates have gone down, the fees have gone up -- like loan origination, title insurance, underwriting and document-processing charges. Typical closing costs for any mortgage, whether refinanced or a completely new one, have been around $3,000 and can run as high as $4,500. And because the lender can't always know what these fees are in the beginning, you should ask for a "good faith estimate," which they're required by law to provide within three days. Generally, those fees are often still rolled into the loan (which makes the monthly payment higher than it would be if you pay the closing costs upfront), but Viotto notes that lenders are starting to ask for the appraisal costs up front, a fee that's usually around $250.
"Like homeowners, lenders are now looking to protect themselves," says Viotto, explaining that they want to see that the borrower is committed to doing this loan. Commitment, in fact, is why it's so important to be prepared. Understanding what you're getting into is the difference between emerging from the refinancing process a happy, healthy and wealthier person -- or as a still-broke, nervous mess.
Interest rates have crept up, but refinancing may make sense for you.
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