Don't Refinance Your Mortgage Without Doing This First, Experts Warn
Skipping this step could lead you to regret your decision in a major way.
The homeownership journey is full of challenges. While having a place that's yours can be truly rewarding, it also requires you to make countless decisions that impact your finances, living space, and overall well-being. One of those decisions might be whether or not to refinance your mortgage. Of course, this process can be tedious. However, it can also allow you to save serious cash over time. Here, we spoke to real estate and financial experts to learn the one step you need to take before signing the dotted line. Read on to find out how to make the best financial move possible.
Get a quote from three lenders before refinancing your mortgage.
You know the staid advice to always get a second opinion? Well, it holds true for refinancing your mortgage, too—and then some. "Get a quote from up to three lenders," says Andrew Young, vice president and consumer direct manager for United Community Bank Mortgage Services. "This allows you to compare the costs and terms from each lender before you refinance to ensure you are getting the benefit you want."
You'll also want to ensure these lenders are people you trust. Esther Phillips, senior vice president of the Chicago area-based Key Mortgage Services, suggests choosing someone referred by a trusted friend, family member, or real estate broker or attorney. "A home is the largest asset most people will ever have, so refinancing should be a personalized experience," she says.
Know the benefits and risks of refinancing.
The primary goal of refinancing your mortgage is to replace it with a new one that will save you money. Often, this is accomplished through lower interest rates or a lower monthly payment. "Other benefits include taking cash out of your home to pay off debt or make home improvements, dropping your mortgage insurance, or shortening the term of your mortgage to save thousands by paying your loan off sooner," says Young.
Of course, there are risks, too. Because it costs money to refinance—those legal and lender fees add up—it's possible to spend more on the refinance than you save. That leads us to our next point.
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Make sure you break even.
Just because a lender offers you a new mortgage with a lower interest rate doesn't mean that's the best deal overall. In order to determine that, you'll need to add up all the legal and lender fees associated with the refinance.
"A simple formula can be employed to determine if these expenses are worthwhile," says Corey Tyner, real estate investor and founder of Buy Yo Dirt. "To begin, deduct your existing monthly payment from your new estimated monthly payment. You will save this monthly amount by refinancing at a lower rate. Next, divide the total cost of the fees by the monthly savings you computed before."
This number shows how many months you'll have to live in the house to break even on your refinancing fees. If you don't plan to stay that long, you'll likely want to continue with your original loan.
Above all else, ask questions.
The worst thing you can do when refinancing your mortgage is to pretend you already know all the answers. "The only thing I implore all homeowners to do before refinancing their home is to understand there are no stupid questions," says Nicole Rueth, senior vice president and producing branch manager for The Rueth Team at Fairway Independent Mortgage Corporation. "And you need to know all the numbers in the deal."
By creating an open dialogue with your lender, you can rest easy knowing you're aware of all the fine print in your new mortgage. That way, you can reap the full benefits of a refinanced loan, with none of the stress.