By: Angela Colley
Homeowners typically refinance their mortgages to save money, but it doesn’t always work out that way. If you’re not sure that you’re getting the best deal, that your home will appraise highly, or if you’ll even qualify, you may end up wasting time and money.
Ask yourself these questions before you consider refinancing:
Will You Qualify?
Requirements to qualify for refinancing can be just as tough as getting an original loan. Have you recently gotten a new job, a raise, or an additional source of income? Then “it’s a good time to be aggressive,” according to Gloria Shulman, a California-based mortgage broker and founder of Centek Capital.
However, if your income is unstable or you’re about to get a promotion with a raise, you might get better terms if you wait to refinance.
Is Your Home Ready?
Before you can refinance, you’ll have to get your home appraised. If your home isn’t in great shape before the appraisal, you could see a “low-ball” estimate that might force you to pay thousands in closing costs, Shulman said. “Problems like a small crack in a pool or a leaning fence can sometimes kill the entire application.”
Before you start filling out applications, “approach refinancing as you would a sale and make your house look great.” Fix any small problems around your house, clean up your space and make your home shine for the appraisal.
When Will You Break Even?
When considering refinancing many homeowners simply subtract the monthly refinanced payment from their current monthly payment to see how much they’ll save. While this is a good indicator of the kind of monthly savings you can expect, it isn’t the whole story.
When you refinance, you’ll pay a number of different costs such as appraisal fees, application and loan origination fees, attorney fees, title insurance and underwriting costs. All of these fees will add to the total cost of your mortgage. As a result, it may take a while before you break even on the deal.
For example, say you’ll save $150 a month by refinancing. If it costs you $3,500 to refinance your mortgage, it would take you about two years to break even. If you sell your home before you break even, refinancing may not have been worth it.
Are You Getting the Best Deal?
The lender with the lowest rate may not be offering the best deal. “Less reputable lenders occasionally try to sneak in extra fees as part of the principal,” Shulman said. She recommends dealing with a “local, reputable source who knows your area. If you think the lender is tacking on unnecessary fees, ‘shut down the deal right away,” Shulman said.
Are You Underwater?
If you owe more on your home than it is currently worth, traditional refinancing may not be an option for you. Many lenders see underwater mortgages as too high a risk to offer refinancing. However, you may still have options through the government-backed Home Affordable Modification Program. Under HAMP you can refinance your underwater mortgage into a mortgage with a lower monthly payment. If you’re underwater and need to refinance, talk to your lender or contact a housing specialist through the government-sponsored Homeowner’s HOPE hotline.