For most people, undertaking a mortgage refinance isn’t something they look forward to. The prospect of lowering monthly payments and paying less interest over the life of the loan are powerful motivators though, so let’s make sure your next refinance is your best.
#1 Start by clearly identifying and defining your goals for refinancing.
It’s important to understand your own motivation for refinancing, beyond the surface level of lowering your interest rate or monthly payments. Get to the ‘why’ behind your refinance goals. Understand how these loan features will actually benefit you, and it will make the decision-making process easier.
If lowering your monthly payments will help you to put more money away for retirement, or into your children’s college fund, that’s a benefit that makes your efforts worthwhile. However, if reducing your interest rate is only creating minimal monthly savings and costs you thousands of dollars in fees, then you can tell quickly that you’re not accomplishing your goals and refocus your efforts.
#2 Shop for service as well as price.
As with most big-ticket items, having the best experience depends as much on the service you receive as the price you pay — in this case that would be the interest rate, fees, and overall costs. When interviewing lenders, consider the level of service they offer and their track-record for delivering on it. For example, if a tech-friendly process is important to you, perhaps the lender suggesting you fax your documents over isn’t on the cutting edge and you should continue your search.
Keep in mind, the lender with the least expensive option isn’t necessarily the best in every case. What good is the best interest rate if your loan is continually delayed by an inefficient process and can’t close on time? How valuable is it to obtain the lowest fees if the underwriting guidelines are so stringent that the underwriter knows you better than your own mother by the time you get to closing?
#3 Gather all of your important documents.
The sooner you can gather together all of your information, the better. You may even want to do this before your initial conversations with lenders, so you know precisely what you’re talking about. That way you can offer your exact income figures, rather than a ballpark, and your loan balance, tax, insurance, and HOA amounts, rather than your best guess. From an organizational standpoint, it’s also much easier for the lender to review everything at one go instead of piecemeal as you locate it. That’s inefficient and honestly how documents can get overlooked or misplaced.
There’s a practical side to this as well, because if you’re missing a critical piece of documentation, it’s much better to find out before you’re halfway through the loan process and have already paid for an appraisal. For example, if your tax returns were destroyed when your storage unit flooded and you’ll need to request a copy from the IRS, this could tack days onto your refinance process depending on how busy they are.
#4 Make sure your home is at its best for the appraisal.
Since no one else in the loan process will have direct access to your appraiser, the appraisal inspection is your chance to show your home in its best light and help the appraiser determine the value accurately. Though there’s no checkbox for “neat and tidy” on the appraisal report, appraisers are only human, and having your property in tip-top shape can only help you.
You’re also allowed to provide the appraiser with information on comparable sales in your area, especially if they reflect favorably on your home. The appraiser may even use your suggestions in their report if they meet the right criteria.
Make sure you’re available to answer any questions the appraiser might have during the inspection — but don’t trail behind them through the house, most appraisers find that to be a bit unnerving. You’ll also want to let them know about any and all improvements you’ve made (when they were done, and approximately how much they cost). It’s hard for an appraiser to figure this out just by looking at your home sometimes, so make their job a little simpler.
#5 Be prepared to provide additional information during the process.
It’s normal for additional information to be requested after your loan is reviewed by an underwriter for the first time. Often, they relay their requests in the form of a conditional approval — which means “your loan is approved if you satisfy these conditions”, followed by a list of documents to provide.
This is a point of frustration for many people, who wonder why the lender didn’t just ask for everything upfront. They do their best to cast a wide net, but sometimes there’s no way to know what additional questions might be raised in the course of underwriting your loan. That’s not to say there aren’t strange requests sometimes, or that lenders don’t ever ask for the same information multiple times by mistake or oversight.
#6 Provide needed items as quickly and completely as you can.
If your interest rate is locked, you’re working against the clock to get your refinance loan closed on time. Providing everything that your lender request, as quickly and completely as possible helps ensure that you’re waiting on them, and not the other way around. If you’re unsure about what’s being requested, ask for clarification — it will save you time and frustration in the long-run.
#7 Understand your life-of-loan savings.
It’s great if you’re able to reduce your interest rate and monthly payments by refinancing, but it may not actually save you as much in the long run if you don’t consider how much interest you’ll pay over the life of your new loan. The thing about long amortization periods on mortgages is the initial years are more interest-heavy (meaning more of your payment goes to interest than to reducing your principal balance). Check out our Amortization Calculator for more information.
Consider this example:
- If you start out with a $250,000 mortgage, over 30 years, at 5.5% you’ll spend $261,010.10 in interest over the life of the loan.
- When the opportunity to refinance comes along, say at 8 years into the loan, you’ll have paid $103,364.18 in interest, but only reduced your mortgage balance to $217,094.81
- If you refinance your $217,094.81 balance into a new 30 year loan at 4.5% you’ll spend $178,900.69 in interest over the life of the new loan — this plus the interest you already paid over the first 8 years of your initial loan adds up to $282,264.87 in total interest paid.
- This is where knowing your goals comes in handy, because you can quickly decide whether you’re willing to make the trade off between lower monthly payments and total interest payments on the loan.
#8 Calculate your break-even time on refinance costs.
Refinancing your mortgage comes with certain costs, like origination, appraisal, and title fees. Either you pay for these yourself (out of pocket or rolled into your new loan), or you choose an interest rate that offers a rebate to cover them. Use our mortgage calculator to figure out your savings.
Knowing how long it will take you to recoup those costs, through your monthly payment savings, can help with your future plans as well. For example, if you have to pay $2,700 in closing costs to refinance and save $50 per month, your break-even time would be 54 months, or 4.5 years into your new loan. In the event that you sell your home or refinance again, the cost of refinancing may not have been worth it.
#9 Learn how to read and understand your Closing Disclosure.
All lenders are required to provide you with your Closing Disclosure (CD) three days prior to your loan closing. This universal document is your last chance to check and make sure you know exactly what you’re getting and what your finance charges will be. The Consumer Financial Protection Bureau (CFPB) provides a Closing Disclosure Explainer to help you read and understand your CD.
#10 Avoid making any major changes to your financial scenario.
Once you begin the refinance process, put all other major financial changes on hold until after closing. This includes changing jobs, retiring, and taking on new debts. You also need to continue making all of your regularly scheduled payments on time — especially the mortgage you’re refinancing.
What many people don’t find out until it’s too late is that a second credit report is often pulled just prior to closing to confirm that there haven’t been any material changes to your profile while your loan was being processed. For example, if you go out and buy a car, the new monthly payments will have to be factored into your debt-to-income ratio and your loan might have to go back to underwriting to be re-approved.