Refinancing a mortgage can save the homeowner thousands of dollars over the life of their loan. However, deciding when, how and with whom to refinance is a difficult decision.
How to Decide When to Refinance a Mortgage
The decision to refinance a home loan must include the following considerations:
- How long before re-sale. It is not a good idea to remortgage if selling the property within the term of the new loan. This could result in future pre-payment penalties.
- The new interest rate. Moving to a higher interest rate could add thousands of dollars onto the total price paid for the property over the span of the loan. Try for a lower interest rate and, for those with variable rate mortgages, seek a fixed rate, if possible.
- Closing costs. These expenses must be factored into the value of the new loan. If the new interest rate doesn't reduce the mortgage value enough to justify the closing costs, it may not be the right time to refinance.
- Cashing in on equity. A home equity loan or cash-out refinancing may be necessary for homeowners with immediate cash needs, but the loss of equity or cost of additional borrowing must be weighed carefully.
Prepare and Shop Around for the Best Mortgage Refinancing Rate
Homeowners should order a copy of their credit report before refinancing their mortgage. Resolve potentially problematic issues such as credit reporting errors or late payments before approaching new lenders, to qualify for a lower interest rate or better terms.
Always compare three to five lenders before choosing a new mortgage. Written quotes should include the new interest rate, closing costs, prepayment penalties, and more. It is important to understand all costs associated with the new loan in order to decide which option is least expensive over the term of the mortgage.
Homeowners should not give potential lenders permission to request a copy of their credit report, as each request counts against their overall credit score. Instead, they can print their own credit report to show lenders and tell them they will be given access if they are chosen to secure the loan.
Reduce or Avoid Mortgage Prepayment Penalties
Mortgage prepayment penalties can add three to six months worth of monthly payments on to the cost of refinancing. Some lenders are willing to work with homeowners to reduce these penalties in order to win their business.
Approach each potential lender and ask if they are willing to shoulder a part (or all) of the prepayment penalty from the existing mortgage. This is something many will consider, especially if the homeowner has other loans or financial accounts they may be able to transfer to the new lender.
Understand No Closing Costs Mortgages and Other Incentives
The old adage, "If it sounds too good to be true, it probably is," rings true in mortgage refinancing. Some lenders offer mortgages with no closing costs. Homeowners need to understand that the closing costs with these loans are actually rolled into the loan itself, increasing the value of the loan and the principle amount on which interest is paid. Therefore, homeowners do indeed pay the closing costs over time, with additional interest.
Always get the terms of the new mortgage in writing. Any verbal offers or agreements must be recorded in writing to protect the homeowner. The Bank of Montreal estimates mortgage closing costs are approximately 3 to 4% of the total purchase price. Ask the lender to explain any figure that varies from this estimation to ensure a special offer or deal is not just a creative way to hide the expense.
Mortgage refinancing can be a great move for homeowners with an opportunity to reduce interest rates, lower their monthly payments and save money over the life of their mortgage. Understanding all of the costs involved is critical to getting best mortgage refinancing deal.
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