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8 Steps to Refinancing Your Mortgage and Starting a New Budget

Apr 4, 2008
With interest rates falling, it might be the perfect time to see if you can benefit from refinancing your house. If your mortgage is more than 5 years old, chances are your mortgage is high compared to the rate you may be able to get today. Also, the possibility is good the price of your house has risen enough to make a refinance attractive.

Many times it is possible to get $50,000 equity or so out of your house without paying a higher monthly payment. This, of course, is only possible if you can find a good interest rate.

If you have decided a refinance is right for you, here are 8 steps to follow to make sure the process will be smooth and beneficial.

1. Plan your refinance

First, you should get a pre appraisal. This can be done by looking in your local paper and finding out how much homes similar to yours are on the market for. Maybe, you can find a Website that has a record of the market value of houses in your area. In any event, get a pretty good idea what your house is worth.

2. Calculate your mortgage amount

Take the value of your home and multiply it times 80%. If you have medium good credit, you should be able to get a mortgage for this amount. Hopefully, this amount will be comfortably higher than the amount you now owe.

However, if the value of the house has declined or you have a mortgage that is 125% of the home's value, you may find you owe more than you can borrow using a standard mortgage. So, you may have to look for an alternative lender or a refinance just might not be in the cards.

At this time it might also be wise to find out how much the monthly payment will be for the amount you will be borrowing. If for no other reason, just to see if you are sure you can pay it. If the interest rate is substantially lower than the rate you now have, you will be pleasantly surprised!

3. Get your documents together

The lender will tell you what documents you need, and some lenders do most of this work themselves. At this point, just be sure you are able to get a hold of your current lender homeowner's insurance company and the law office, if any, who represented you at your previous closing.

4. Talk to a bank or mortgage broker

Sometimes a bank is the best lender because many times you can get a 0 point mortgage from them. However, if you want a little more creative financing, definitely call a broker or go to an online mortgage broker who will come up with many offers for you. It is nice to have the pick of the litter.

However, one word of caution; you will get a lot of offers. So, make sure you're ready if you deal with one of them!

5. Get a real appraisal

After you fill out an application, the prospective lender will want a real appraisal. They will tell you exactly what you have to do and it is usually nothing. They will set up the appraisal. Just make sure your home and yard are clean.

Sloppiness can make for a low appraisal and you want your house to get you as much money as it possibly can.

6. Receive offer or offers

If you will be getting multiple offers, you will find some will have higher points than others. The rule of thumb is; pay higher points with a lower interest rate if you're going to own the house for a long time. If you will be selling in less than 5 years, go for low points.

7. Make sure you have representation

You will have a closing coming up and a closing is a legal deal and, as such, there are lawyers involved. Your new lender will be able to dig one up for you but ultimately you can choose your own if you feel it is necessary. Just make sure you're comfortable with the people you are dealing with.

8. Go to the closing

If you have gotten this far, it is a beautiful thing. You will get a nice big check on this day and chances are you will be able to start a new budget which you will be able stay on.

Perhaps you will be paying off high interest rate debt, like credit cards. Also, it is likely your overall monthly debt will be much less than it has been in quite some time! On top of this, maybe the new lender will not require the first payment for a couple of months or so. This is common practice with some of them.

So, congratulations! A refinance, when it is done at the right time can change a family's financial future.
About the Author
Ed Lathrop is a successful real estate investor and a series 3 commodities futures broker. He has extensive knowledge of the credit/mortgage markets as well the commodities futures market. He has built a free amortization calculator where you can go to print out any amortization schedule you need at: Amortization Schedules Free. Also, get a free house payment chart at House Payment Chart.
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