When a borrower needs to refinance his mortgage, several factors come into consideration. Is it a financially viable idea? Will the new debt be affordable, if I cash out part of my equity? Will the lower interest rate really save me money? Through research and discussions with lenders, any borrower can confidently answer each of these questions.

Prep Work

Gather important documents togethers. The lender will ask for the past two months of pay stubs, two months of bank statements (all pages) and two years of tax returns. Additional information such as social security payments, retirement accounts and divorce decrees may be needed as well. Check your credit through a service such as AnnualCreditReport.com and make sure to report any errors to the credit bureau. The goal is to make sure you have the highest credit possible going into the application process. Make sure to bring a copy of the credit report with you to your appointment with the lender.

Shopping Around

Check with three different lenders for comparisons on mortgage quotes. Ask for a Good Faith Estimate and Truth in Lending Statement from each lender. The Good Faith Estimate will outline the fees associated with the loan and the Truth in Lending Statement will tell you the APR (annual percentage rate) associated with the loan. The APR is the numerical value of the total cost of the loan for one full year, including the monthly interest rate and the closing costs. Compare offers and either select the lowest, or ask the lender that you feel the most comfortable with to match or beat the best offer. Remember to bring a copy of the credit report with you, including your score, and show it to each lender. Do not allow them to check your credit until you make your final decision. Each time a lender checks your credit, your score drops a few points. Limit your credit checks to two at the most, to limit the effect on your score.

Making the Decision

Once you have the lender selected, it is time to make the final decision. If you are doing a rate and term refinance, and not receiving any extra cash out, divide the closing costs by the amount of money saved each month with your new, lower payment. If it takes less than 24 months to break even on the closing costs, the refinance is probably worth it, unless you plan on moving prior to the 24 month mark. For a cash out mortgage, consider what you are using the extra money for in comparison with the increased mortgage payment. Is the extra debt worth the expense? In the event of debt consolidation, the extra debt may help you to control your budget and get out of debt faster. Take all the factors into consideration and ask your lender for advice.

Source:

The Federal Reserve Board

Freddie Mac