While the essential elements of shopping for a mortgage are the same for a purchase or refinance, the refinancing process usually starts with a decision to either improve your cash flow or change your debt profile, says Russ Anderson, a centralized sales executive with Bank of America in Los Angeles. He says you should determine your goal for refinancing before you meet with a mortgage professional.
Once you've decided whether you want to reduce your mortgage payments or pay off your loan faster, you can begin shopping for a lender and a loan.
"The average consumer shops for a refinance like they're shopping for a flat-screen TV," says Barry Habib, chief market strategist for Residential Finance Corp. in Columbus, Ohio. Everyone's price conscious, he says, but not everyone does their homework to determine which product best suits their short and long-term goals.
6 steps to refinance shopping
No. 1: Start online. Deborah Ames Naylor, executive vice president of Pentagon Federal Credit Union in Alexandria, Va., recommends starting with a refinance calculator that estimates your monthly payments at various loan terms.
"A shorter term loan will have a lower interest rate than a 30-year fixed-rate loan, but the payment will be higher because you're paying it off faster," says Naylor. "It's important to decide what payment you're comfortable making before you see a lender, because that payment could be much less than the payment you qualify for."
No. 2: Loan term. Habib says the loan term you choose needs to be made in the context of your other financial obligations and plans.
"If you have $30,000 in credit card debt and no savings for college, you may want to go for a 30-year loan to keep the payments as low as possible," says Habib. "Someone else may want a shorter term to build equity faster while another borrower might want a longer loan so they can keep their tax deduction as long as possible."
No. 3: Talk to multiple lenders. Research loan products available from a credit union, a regional or community bank, a direct lender and a national bank to find out what special programs they offer, says Naylor.
"Many lenders offer 'portfolio loans,' ones they keep in-house instead of selling on the secondary market," she says. "They can be more flexible with those loans and offer special promotions."
Instead of choosing a lender solely based on current mortgage rates, Anderson says you need to find a lender you can trust. "People get too wrapped up in the rate rather than finding someone who will communicate with them," he says. "You need to find someone you trust, who will be engaged in your family's financial situation."
No. 4: Loan options. Discuss various loan products when interviewing lenders.
"There's a broad product mix of conventional financing, government-backed programs like FHA loans and special refinancing programs through the Making Home Affordable program," says Anderson. "A good lender can present the pros and cons of each of these programs in the context of your individual finances."
No. 5: Decide how you'll finance your refinance. Closing costs and lender fees can be paid at closing, wrapped into your loan balance or you can opt for a "no-cost" refinance.
"A no-cost refinance means that your lender will pay the fees and you'll pay a slightly higher interest rate of one-eighth to one-fourth percent," says Habib.
HSH.com's mortgage refinance calculator can help you decide the best way to finance your refinance.
No. 6: Compare mortgage rates and fees. Advertised mortgage rates are sometimes based on paying points, so you need to make sure you compare loans with zero points or the same number of points.
"It's important to compare all three things that factor into what your loan will actually cost: the interest rate, points and the loan origination fee," says Naylor.
According HSH.com, average mortgage rates for the week ending April 26, 2013 were:
- 30-year fixed-rate loan: 3.52 percent
- 30-year FHA-backed fixed-rate loan: 3.28 percent
- 15-year fixed-rate loan: 2.78 percent
- 5/1 ARM: 2.58 percent
Mortgage rates vary daily and sometimes hourly, so it's best to compare rates on the same day.
While shopping for a refinance may take a little longer than refinancing with your current lender, the rewards can last as long as your loan.
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Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.