By FPA member Leslie T. Beck, CFP®, MBA
Last Updated: March 21, 2011
The recent uncertainty generated by the Japanese earthquake, tsunami, and nuclear power disasters has caused U.S. interest rates to plummet in the last week. Freddie Mac said that the average interest rate on a 30-year fixed rate loan had dropped during the week to 4.76 percent, compared with 4.88 percent for the previous week.
Many borrowers who were eligible to do so may have already refinanced during the past two years, with 30-year mortgage rates bottoming out at around 4.23 percent in October 2010. But if for one reason or another you have not yet refinanced your mortgage, now may be a good time to take the leap, as rates are forecasted to resume their rise once the current crisis has passed.
Before diving in however, make sure you do your research. Below are some tips to consider before submitting your application.
- Check your credit rating. Before you do anything, make sure you check your credit rating. Refinancing, like any mortgage these days, can take a lot of work and a lot of time — spare yourself the pain of a rejection by checking your credit scores before submitting your refinance application. A low credit rating can affect the interest rate, as well as the availability, of any refinancing.
- Have a good idea what your home is really worth. A drop in your property’s value may prevent you from being able to refinance. So do a little research and find out what properties, similar to your own, have been selling for in your neighborhood. If those amounts indicate that you may have little or no equity left in your property, you may be unable to refinance without putting additional funds down, even if you would otherwise meet a lender’s mortgage qualifications.
- Know why you are refinancing. Are you interested in a lower payment? A shorter payoff period? A locked-in fixed rate? Look at the various combinations of loan rates, terms, and payoff periods to determine the best way to reach your goal. Sometimes taking a lower payment (vs. a faster payoff) can give you more flexibility — you can always pay more than the required monthly payment (which will pay down your principal faster), but paying less than required is usually not an option.
- Make sure refinancing is a good idea. Refinancing is not always a good idea, even when you are able to do so. When might refinancing be a bad idea? If you have a prepayment penalty on your current mortgage, have had your mortgage for a long time (and are basically just paying back principal), or you plan to move in the next few years, refinancing may not be a good idea.
- Have your documents handy. Once you’ve made the decision to refinance, make sure you have your back-up documents handy. Be prepared for your lender to ask for two to three months’ worth of bank and other asset statements and paycheck stubs; and two years’ worth of W-2’s and tax returns. If you are self-employed or rely on other income such as alimony or child support, you may be asked for additional documentation as well.
- Shop around. Mortgage rates, fees, and underwriting requirements can differ widely from lender to lender. Check with multiple lenders for rates and any special programs they may have. Also, check with your current lender to see if there are any breaks available for refinancing with them. If your current mortgage is relatively new (two year or less), you may be able to re-use some documentation, such as an appraisal, survey, or title search, which could save you some money on the refinance.
The Federal Reserve website provides a good overview of the how’s, why’s, and why-not’s of refinancing a mortgage.
FPA member Leslie T. Beck, CFP®, MBA, is a founding member of Compass Wealth Management LLC in Maplewood, NJ. She is also President-elect of the Financial Planning Association of New Jersey.