Financial Education


Take Steps to Refi Your Mortgage

Consumer Engagement Editors / February 5th, 2016

Low mortgage rates and revived home prices are combining to make this a smart time for qualified home owners to refinance mortgages. The key word is "qualified." Many homeowners have stayed on the sidelines in recent refi rounds as they learnedor believedthey could not meet a lender's loan requirements. They should not assume they still are out of the running for a better mortgage rate. To help you decide if this is a smart time for you to refinance:
  • Calculate your break-even point. This is how soon you will recoup the cost of refinancing through lower monthly payments. If the cost to refinance is $2,125 and your monthly savings is $125, your breakeven point is 17 months (2,125 divided by 125).
  • Ask about fees. If you're paying $4,000 in fees to slash monthly payments by $100, refinancing doesn't make sense if you plan to sell in three years.
  • Look at a fixed-rate instead of an adjustable-rate mortgage (ARM). Despite a slightly lower rate on ARMs, the differential isn't worth the higher risk of an ARM.
  • Consider job stability. Switching from a 30-year to a 15-year fixed-rate mortgage lowers the total interest you'll pay over the life of the loan. But if you lose your job, you'll be stuck with higher payments you might not be able to afford. If job stability is a concern, keep a 30-year loan and consider increasing your monthly payment nowwhile you have a jobto the rate it would be for a 15-year fixed-rate loan.
Then take these steps as you get ready to approach a lender:
  • Clean up your credit. A credit score of 740 or more, plus 20% equity in your house, likely will get you the best interest rate.
  • Shop for the best rate. Start at your credit union and ask about options and rates. Get good faith estimates to compare offers before you formally apply.
  • Collect documentation. You'll likely need to provide recent pay stubs, two years of W-2s, proof of home insurance, two months of financial statements, andif you're self-employedtwo years of tax returns.