Following five crucial steps can guarantee a successful refinance

MARILYN KENNEDY MELIA BANKRATE.COM

Perhaps you are among the millions planning to swap your old mortgage for something better.

If so, there are five crucial steps you need to follow to guarantee a successful refinance:

Weigh the pros and cons

A refinance allows you to take out a new loan that pays off your current mortgage.

It's important to look beyond the immediate monthly savings.

Consider how much interest you'll pay with a new loan in total, compared to what you've already paid with your old loan.

Lenders structure loans so that borrowers pay off interest charges in the first years.

Even though your monthly payment is lower, you might pay more interest over the life of the new loan than you've got left to pay on your old mortgage.

The lure of low monthly payments is the reason many homeowners select new 30-year loans.

How do you know if refinancing is the right choice?

It's often said that if you can recoup the cost of a refinance in a year, it's worth doing. But that maxim is too simplistic.

Gather important documents

If you took out a mortgage a few years ago during the housing boom, you may be surprised at the increased scrutiny lenders apply to potential borrowers.

You'll need to prove -- through bank statements and pay stubs -- exactly how much money you have coming in and how much you have in reserves.

Save recent pay stubs, as well as the last few income tax statements and W-2 forms from your employer.

Bank and brokerage statements for at least the past couple of months often are required.

As soon as you think you're going to refinance, get copies of your credit reports and make sure there aren't any errors that will drag your score down.

Shop several lenders

If you were satisfied with the firm that provided the loan you have now, start there. It may not want to lose your business, and will cut costs.

Check with banks, credit unions and mortgage brokers. Remain suspicious of any lender that comes to you unsolicited. Such offers could be scams.

Today's declining housing market may make it more difficult to qualify for a loan.

Lenders are leery of mortgages within 5 percent or 10 percent of home value, fearing prices could drop even further until the home price wouldn't fully back the loan.

A mortgage insured by the Federal Housing Administration may be the only viable option for homeowners in this situation.

Call lending companies and ask if they offer FHA loans. Not all firms do, but more lending companies are becoming FHA-approved.

Ask about all fees

When you take out a mortgage, you incur closing costs that can tally $2,000 or more.

It's crucial to ask all prospective lenders for a detailed breakdown of these fees.

Within three days of applying for your mortgage, law requires that you receive a good-faith estimate of these charges. Expect the lender to give you specifics on all costs before you pay a couple of hundred dollars in a loan application fee.

Charges associated with a new mortgage include the application fee, credit-check fee, appraisal fee, origination fee, document-processing fee and underwriting fee.

Title charges, recording fees and tax transfer fees also can apply.

When consumers use a mortgage broker (as opposed to a bank), looking at the good-faith estimate may not provide enough information to decipher exactly how much money the broker is making on the loan. The broker may earn a fee from charging a slightly higher rate on your loan, known as a yield-spread premium.

Ask specifically what the fee is. If you don't think it's fair, say so.

Watch the little details

It's important to keep an eye on the small details that can make a big difference to your bottom line.

Because mortgage rates move up and down from day to day and week to week, it's important to lock in your rate when you find a good deal.

A rate lock is a contract guaranteeing that the rate your lender offers will remain in effect for a specific period.

Most people lock in their rate so they get the rate at closing that they were quoted at application. Some lenders will guarantee your rate won't go higher, but will go lower if mortgage rates continue to fall.

It's important to remain vigilant, particularly in terms of extra fees.

Although a good-faith estimate of closing costs lists the charges for your loan, it's not always exact. It can be complicated if homeowner's insurance and property taxes are paid at closing.

Also, borrowers may be asked to prepay interest charges. If they close in the middle of the month, they may need to pay interest for the remainder of the month.



Source

Planning to swap an old mortgage is quiet hastle.