I feel like an expert on home refinancing some days. In the last three years, I've refinanced my home twice to take advantage of low-interest rates. Even though interest rates have been going up recently, refinancing may still be a good idea if you have a mortgage with a high-interest rate. When my husband and I built a new home in 2000, we thought interest rates were a little high, so we chose a three-year mortgage with an 8 percent mortgage rate instead of a 15- or 30-year mortgage with a slightly higher rate.
We thought that interest rates would go down before we had to renew our mortgage, and they did. After two years, when the rates went down to 5.5%, we refinanced. I called local banks, credit unions, and savings and loan companies to find the best rate I could. I also checked the Internet for interest rates.
After a year, I checked the rate on the Internet and found that it was 4.375 percent. (I looked up interest rates after hearing that someone just refinanced their mortgage at 4.5 percent.) I ended up refinancing again, but not before figuring out how much I would save in interest and how much it would cost to pay for the new loan. I did the math and found that it would take about 18 months of payments at the lower rate to cover the cost of refinancing. Even though my husband and I now have a very good mortgage rate, our payment is a little higher than when we were paying 8 percent interest. But we have a 15-year mortgage instead of a 30-year mortgage. We can pay off our house in half the time we thought it would take because the interest rate is so low.
Even though interest rates have been going up recently, they are still low compared to the rates on many credit cards. People may consider refinancing not only to get a lower interest rate, but also to take some of the equity out of their home to do things like pay off high-interest credit cards, fund a home improvement project, or pay for their child's college education.
Here are some of the things I learned when I refinanced my house twice in the past few years.
- You might want to do business with an online bank. Checking to see if the bank is insured by the FDIC is a good way to find out if it is a real financial institution. You can find the current link to check by searching online for "banks insured by the FDIC" or something similar. When I found an interest rate of 4.375 percent, it was with an online bank whose employees lived in the East of the United States. The Midwest is where I live. I was able to do business with the bank easily because of the Internet. Any paperwork I needed to fill out was either emailed to me, faxed to me, or put on a secure website that I could only get to with my own user name and password. The secure website was linked to a well-known company that lends money. The lender hired a lending company in my area to handle the final signing, so my husband and I went there to sign the last papers and close the loan.
- Write down everything and pay attention to deadlines. For example, if someone tells you a certain interest rate, you should get it in writing. Be aware, though, that the interest rate you are given will only be locked in for a certain amount of time, usually 30 days. Even if interest rates go up during that 30-day period, you will still get the lower rate you were promised in writing. Some lenders will automatically give you the lower rate if rates go down. There is a chance that the rate guarantee period could be made longer. When we were going through our second refinancing, a lot of people in the U.S. were doing the same thing because the rates were so good. Because of this, it was hard for our lender to schedule an appraisal. Even though rates had gone up and we didn't close until almost 2 weeks after our 30 day deadline, the lender stuck to the rate they had promised us.
- Each lender has different closing costs. The government of the United States requires lenders to give you a "Good Faith Estimate" of your closing costs. Closing costs usually include things like credit report fees, title company service fees, title search fees, loan origination fees, appraisal fees, and documentation fees. Your lender will give you an honest estimate of how much your closing costs will be. Your actual cost may be a little different because the lender doesn't always know how much a certain fee, like the appraisal fee, will be. This is because they probably work with more than one appraisal company, and each one probably has a different rate. One more thing to remember about closing costs is that you may see ads for companies that say they don't have any closing costs. That might be right. The lender may pay your closing costs, but you will likely have to pay a higher interest rate in exchange.
- When you refinance, you may have to pay other fees. For example, the first company we used to refinance with wanted us to keep 12 months' worth of property tax money with them. When we first got our loan, the credit union we used didn't ask us to put any money aside for property taxes. For that tax escrow account, we had to come up with a lot of money that we hadn't planned on. I was smarter the second time we refinanced, so I asked how much money needed to be kept in escrow for taxes. We only had to pay for 6 months of property taxes, so we got some of our tax escrow money back.
- Find out if the loan you want to take out can be sold to other banks. Your loan could be sold, which may or may not be a problem for you. Loans are often sold to other people. Your local bank may even sell some of its mortgages. It doesn't bother me at all if my mortgage is sold to another lender. It happened to me once, and the process was almost too easy for me to notice. I only had to do one thing, which was to set up a new automatic payment from my checking account. I like having my mortgage payment automatically taken out of my checking account every month. So, I won't have to worry about forgetting to pay it on time and getting charged late fees.
- Ask if you'll have to pay for your own homeowners insurance or if you'll have to put money into an escrow account each month so the lender can pay it for you. Many lenders will ask you to put money into an escrow account to pay for the homeowner's insurance.
- The best deal isn't always the one with the lowest interest rate. Some companies may offer a very low interest rate, but they may charge you a lot of "points" on top of that. A point is equal to 1% of the amount you want to borrow. For example, if you want to borrow $200,000 and you have to pay three points, you will have to pay $6,000 on top of other closing costs.
When I refinanced my house twice, I learned the things above. I've tried to include everything I've learned about refinancing, but your experience may be different, and you may learn things I didn't. If you are thinking about refinancing, my best advice is to take the time to do research, compare lenders, find out what your total costs will be, and ask questions about anything you don't understand or aren't sure of. This will make the process easier for you and help you avoid unpleasant surprises that end up costing you more money than you had planned.
