What you need to know before refinancing

Perhaps you’re a homeowner in need of some quick cash. Maybe you want to consolidate your debts so you have better control of your money. Perhaps you want to refinance because interest rates are low, and the mortgage broker has a too-good-to-be-true deal that will shorten your current loan’s term.

Here are 6 essential questions to ask yourself before making the decision to refinance.

1. What’s My Motive—and What Will It Cost Me? Before you even consider a refinance, ask yourself this fundamental question: “Why do I need it?”  If you want to lower your current loan payments or switch to a different type of loan, you must calculate the benefits before going the refi route. “If someone is going from a fixed loan to another fixed loan, the general benchmark is to see a 1% reduction of interest rates to justify it. Sometimes the borrower goes from a fixed-rate loan to an adjustable to lower his payments. Sometimes he does just the opposite—maybe to get away from interest-rate volatility. These are very personal decisions, specific to each individual client.

2. How Long Will I Be in the Property? You may already know—or suspect—that you will not live in your current home beyond a certain timeframe (perhaps 5 years). If this is the case, why would you even consider a 30-year loan?

Sometimes, an adjustable-rate loan or a ‘hybrid’—say, a 5-year fixed, then converting to an adjustable—makes the most sense.

3. What Am I Worth? Do your homework before trying to qualify for a new loan. You should know:

• The approximate market value of your property, as “loan to value (LTV) is one of the primary factors that control interest rate.

• Your credit score, which will affect your overall ability to secure a loan, as well as the interest rates offered and the options available to you.

4. Do I Have a Competent Mortgage Broker? In certain cases, refinancing may not yield “a monetary savings, per se. This means there must be “compelling reasons” to secure a new loan. “A good Mortgage Broker will ask a series of questions to help the borrower identify his best option. The broker should:

• Assess your current monthly cash flow and potential future risks.

• Calculate your monthly savings if you were to refinance.

• Determine how long it will take you to break even.

• Fully explain the different types of loans and interest structures.

• Disclose all closing costs and “hidden” fees (origination fees, escrow, title, underwriting, interest, taxes, insurance, prepayment penalties, etc.).

• Treat you with respect and as an individual—not come up with a one-size-fits-all, cookie-cutter approach to your financial future.

5. Do I Need a Second Opinion? Because banks have an interest (pun intended) in having you sign on the dotted line, it’s often worthwhile to seek advice from a certified financial planner or other expert who has no investment or agenda when it comes to your refinancing decisions—especially if you’re a first-timer who lacks fluency in real estate issues. Accept your limitations, and have enough smarts to ask for help. A lot of money is riding on this decision, so never let pride get in the way of making the right choice.

6. Will This Hurt My Credit Rating“ While refinancing, in and of itself, will do very little damage to credit scores, what will cause harm is excessive shopping amongst too many lenders. Each time a credit report is pulled by a ‘potential grantor of credit,’ it shows up as an ‘inquiry’—and each inquiry drops the credit score by a little bit.