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Thursday, November 29, 2012

Refinancing: Does a New Mortgage Make Sense? 6 Do's and Don'ts


I'm not a mortgage broker or banker, but refinancing can be a great way to save money and help you more quickly get rid of a mortgage with less favorable terms . And with interest rates near historical lows, you may be wondering whether a new loan makes sense for you.

Perhaps, but keep in mind that not all refinance offers are worth the trouble or the expense. Before making a decision, take a look at my following six do's and don'ts.

1. Do Pull Your Own Credit Report and Score

Start out by pulling your credit reports so that you know exactly what a prospective lender will see. You don't want any nasty surprises, like having someone else's late payment showing up on your report by mistake or other errors that may not belong to you.

Under federal law, you're entitled to one free copy per year of your report from each of the big-three credit bureaus: Equifax, Experian and TransUnion. You get it by visiting annualcreditreport.com.

The report won't include your FICO credit score, which is a summary of the information in your credit reports that represents your potential credit risk. It will cost you $19.95 online to get the FICO report.

From a bank's perspective, typically your credit score is a reflection of what kind of risk you are....The lower your risk, the higher your credit score will be. And the higher your score, the lower your mortgage rate will be. See?

2. Do Shop Around for the Best Rates and Lowest Overall Fees

In recent months, mortgage interest rates have fallen well below 4 percent for many, their lowest levels since the 1950s. But not everyone qualifies for the super-low rates. They're normally granted only to people who have excellent credit and at least 20 percent equity in their homes.

So pick up the phone and start dialing lenders -- however, if you contact me, I'll refer you to the best mortgage lenders. Have your credit score in hand, the person at the end of the call will want to know. You can also shop online at mortgage comparison sites like HSH.com or bankrate.com, which will do the rate hunting for you just to get going.

Just understand that rates change on a day-to-day basis.

I suggest asking about other refinancing expenses such as loan origination points, loan discount points and lender fees such as underwriting, processing and application fees. And, the big "and", your re- finance expenses can usually be rolled into your new loan so there is no cash outlay from you.

Don't focus just on the interest rate. Instead, look at the overall APR or annual percentage rate on a loan, that way, you'll be able to make a true, apples-to-apples comparison of the overall cost of credit.

Most large banks are charging lender fees ranging from about $1,200 to $1,700 for each mortgage closed.

3. Do Use Caution When Taking Cash Out - Better Yet, Do Not Cash Any Funds Out

Some people use mortgage refinancing as a way of retiring higher interest debt, such as credit card balances you borrow extra for that. While eliminating that kind of debt is a good strategy, you don't want to do a "cash out" refinance deal only to run out and charge up the credit card. The risk is that you'll end up both with big credit card balances and with a larger mortgage note that may become unaffordable.

4. Don't Let Low Rates or Teaser Rates Get You Into Trouble

It's easy to want to trade in your current mortgage for a new one when it seems like everyone else has a lower rate than you or when banks are offering "teaser" rates, like adjustable rate mortgages that start off low and then reset upward.

You may have family members, friends or your local, friendly banker telling you to follow the old, conventional wisdom that you should refinance whenever rates fall by at least 1 percent. Be careful as this may not be the best advice you can get.

But getting a new mortgage doesn't always make economic sense.

No matter what somebody's telling you, you need to run the numbers and see if a refinance is wise financially. For people who've had their mortgages for 15 years or so, and they've already locked in a low rate, refinancing may not be worth your while.

That's easy to figure out, what you pay now, and what you will be paying when refinanced in the same number of years of your mortgage amortization period left in your existing mortgage - the number of years left in your existing mortgage, including the closing costs.

Here's a no- brainier - you have 20 years + left on your current conventional mortgage with a 6.5% rate and a balance of $250,000 + and your credit score is 720+.  Your monthly savings could easily be $500/month.

And just as you should always read the terms and conditions of any credit card offer, so should you read the fine print of a new mortgage.

5. Don't Extend the Term of Your Loan Unnecessarily

In my opinion, nobody over the age of 50 should be taking out a 30-year mortgage. Who would want to be paying a mortgage in their 80s? I'd say go for 15-year loan at the current low rates, especially if you have current great income.

So the strategy here folks is that instead of starting all over again with a new 30-year loan, opt for a loan with a shorter term so you can more aggressively eliminate housing debt. Right?

My advice, of course, won't apply to everyone. Sometimes older Americans are struggling to just pay their bills. So if you're refinancing because you need a lower payment and if it's a choice between defaulting on a current mortgage versus taking a mortgage with a longer term, then by all means take the longer mortgage.

6. Don't Accept Surprises at the Closing Table

In years past, it wasn't uncommon for borrowers to be hit with unexpected fees and rate changes when they proceeded to settlement on their loans. These days, that should not happen at all from competent mortgage lenders, thanks to recent federal laws protecting consumers in the mortgage market.

For starters, you can now get a special statement 72 hours before closing. Known as the HUD-1 form, it contains an accounting of all the costs tied to your mortgage. You should carefully review it and compare the lender fees and expenses listed on your HUD-1 to the GFE, or Good Faith Estimate, that your lender initially gave you.

You have specific rights. Anytime the rate on your APR changes by more than one-eighth of a percentage point, the law stipulates that a lender must re-disclose that to the consumer. And they have to re-disclose the loan at least three days prior to closing.

But if you don't catch something particularly as you're signing a slew of documents during closing you needn't worry. That's because mortgage borrowers have three days to change their minds.

If you close on a Monday, you have the next three days Tuesday, Wednesday and Thursday to rescind or cancel the transaction. So if you think something isn't how it should be, use those next few days to ask questions and investigate.

By the fifth day, Friday, the time will be up and you'll be the holder of a new mortgage.

But if you've followed my six steps, you should be able to pay it just fine.

Richard Bazinet - Phoenix Scottsdale Real Estate - Realty ONE Group