6 Tips for Refinancing Your Mortgage

In the wake of the recent devastating earthquake, tsunami, and ongoing nuclear crisis in Japan, growing concerns that economic growth could slow has led to a decline in U.S. Treasury bonds as many investors have turned to more secure investments. As mortgage rates typically follow yields on Treasury notes, U.S. interest rates in turn have decreased dramatically.

Immediately following the disaster, interest rates fell for 15-year and 30-year loans, with the interest rate on a 30-year fixed rate mortgage dropping to 4.76%. Although the rates have rebounded somewhat over the past few weeks, according to Freddie Mac, the 30-year fixed rate was still 4.87% in the first week of April, as compared to 5.07% a year ago.

If you missed out on refinancing last November when rates tumbled to a 40-year-low of 4.17%, you may have another chance to snag a great deal before rates begin to rise again. The Mortgage Bankers Association has forecast rates to increase to 5.3% in 2011 and to 5.8% by 2012, so there is no better time.

But first make sure to do your research and consider the following tips before deciding if refinancing your home makes sense for you:

1. Run a credit report. Before you go any further, check all three of your credit scores to make sure there are no surprises later and to ensure your rating is high enough to be eligible for a significantly reduced interest rate.

2. Evaluate your home. If the value of homes in your neighborhood have dropped substantially and you now owe almost as much as your home is worth, you may not have enough equity to qualify for outright refinancing even with good credit.

3. Decide if refinancing makes sense. Depending on your situation, there can be drawbacks to refinancing having to do with timing and existing loan conditions that can make it a bad decision such as steep prepayment penalties on your existing loan. If you have paid down your loan and are only making principle payments, you would not want to take on a new loan where the majority of your payments would go to interest again. Also, its not wise to refinance if you’re planning to move in the next few years, as it can take several years to recoup the closing costs, points, and fees you will pay to refinance.

4. Question why you want to refinance. What is your motivation? Do you want to lock in a fixed rate? Do you want to lower your monthly payments to free up more cash with the flexibility to pay more if desired? Do you want a shorter term so you can pay off your home faster? Compare all of the terms and rates available to decide how to best accomplish your objectives.

5. Assemble required documentation. Before you begin to talk to lenders, gather the necessary records including pay stubs or other proof of income and bank statements covering the previous two to three months, as well as income tax returns with W-2’s for the last two years.

6. Compare multiple lenders. There can be wide variations in mortgage rates, programs offered, incentives, and fees charged from one lender to the next so shop around, take your time, and carefully compare the offerings of a number of lenders before making any decisions. If your last mortgage loan was taken out within two years, ask your lender about the possibility of saving money on your refinance by using the prior survey, title search, and appraisal documentation.