How to Refinance Your Mortgage
"A penny saved is two pence clear." - Benjamin Franklin
Many people are taking advantage of low-interest rates by refinancing their mortgage. You know this is especially true when you see in your social media feed friends asking about how to refinance their mortgage. I've seen many replies to these kinds of posts' problems, but I felt many of the answers provided were too short and missing a lot of important information. Here are the steps to take when refinancing your mortgage.
Before we get to how to refinance a mortgage, let's look at why people refinance. First, refinancing is the process of replacing your old home loan with a new home loan. And usually, moving to a new home loan will result in better terms for the borrower. The primary reason people look to refinance their mortgage is to take advantage of a lower interest rate. The lower rate can reduce the total cost of the loan and the monthly payment. And, saving some money each month or over many years can be very advantageous for achieving other financial goals! Other times, people are looking to pay off their loans sooner. In this case, folks often take advantage of a lower interest rate and move from a 30-year mortgage to a 15-year mortgage. Ultimately folks are looking to squeeze efficiency out of their finances. Which leads me to answer the question, "How do I refinance my mortgage?"
Ask and Answer Your Why
The first step is to answer these questions for yourself: What is the goal of the refinance? Do you want to pay off the loan sooner? Do you want to have a lower monthly payment? How will the refinance impact your monthly household cash flow? How will the refinance help you live a better life or accomplish other goals? Having a budget already mapped out and understanding your values and goals ahead of time will make answering these questions easier.
This flow chart titled "Should I Consider Refinancing My Mortgage?" walks through the question you should first ask yourself before shopping around for a new loan. The flow chart will help guide your thoughts around private mortgage insurance (PMI), balloon payments coming due on your existing loan, credit scores, and loan to value ratio. Borrowers often overlook this first step. This flow chart guides thoughts around the "Should I?" and will help you understand if moving to the next step is the correct step.
Once you've developed an understanding of the "Should I" refinance question, you should start to shop around for a new loan. You can do this by using a mortgage broker, visiting several banks, or using a website search service such as bankrate.com. Each option has its pros and cons. A mortgage broker may be more expensive, but a good broker will educate you and do the shopping for you (in theory, saving you some time and maybe some angst). Visiting several banks may increase your knowledge and develop professional relationships with local institutions. Just keep in mind loan agents and mortgage brokers may have a financial incentive to push particular mortgages. Some mortgage brokers are required to act in your best interest (this will depend on your state). Always understand the loan officer's or broker's compensation model (this will help you understand their motivations). The DIY route may save costs but require more time to find the mortgage provider best for you. Carefully way the pros and cons of doing it yourself or working with mortgage professionals.
Next, gather several estimates. Always request a Good Faith Estimate (GFE) from several potential lenders. Review each lender's estimates and compare them. The GFE will outline the new term, payments, interest rate, fixed vs. variable rate, fees, and other settlement fees. The estimate is where the meat of the analysis should take place. Be sure to review if there are prepayment penalties or balloon payments. And be sure to check your escrow. Keep in mind your escrow is required for taxes and insurance, and refinancing your mortgage will likely impact your current escrow account. If you use a mortgage broker, feel free to ask them to share with your the estimates. Doing so will enable you to become more informed.
Negotiate and Learn
Negotiate and ask questions. Don't stop till you have them all answered. Don't be afraid to negotiate. Many parts or a mortgage are negotiable. Features you can negotiate include discount points, rate, term, and fees. Contribute to a mortgage. Because you have acquired multiple quotes, you may be in a position of strength to negotiate better terms for your situation. And be sure to ask questions. A mortgage is a long-term commitment. And if you are unsure or don't understand something, be sure to have all your questions answered. It's your hard-earned money.
Analyze Alternatives Revisit the "Why?" questions listed in step 1 above. Then ask yourself, "Which loan aligns with my goals the most? Which loan will save me the most money for my stated goal?" Review your choices and reflect on how it will impact your monthly budget. Only choose a strategy that enables you to live your best life.
Make a Decision Finally, make a decision, reap the benefits, and monitor for other opportunities down the road. It is essential to keep apprised of your situation and the interest rate environment. Maybe your income increase, and now it may make sense to move from a 30-year mortgage to a 15-year mortgage. Or you refinanced two years ago, and you assume rates haven't changed much. Well, you may be surprised; it may make sense to refinance again.
Monitor Monitoring your financial progress is essential because life and the world changes. And this is why working with a trusted financial planner can be valuable. A financial planner will help you build and maintain your budget. They will be there to help you when life throws curve balls. They will help you evaluate the dollars and cents and provide you and your partner an objective voice in your financial decisions. Your financial planner will help you in this monitoring process. To learn more about the value of financial planning, visit Pursuit Planning and Investments, LLC.
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