Preparing for a Mortgage Refinance: 5 Steps

A mortgage refinance basically means paying down your mortgage with a new loan. Ideally, the new loan has better terms or a lower interest rate. Home owners should seek refinancing when they feel they can get a better deal from a new loan, usually from an alternate lender. Prepare yourself appropriately before seeking a mortgage refinance to get the best deals.

Step 1:  Check the Market

Know what interest rates are currently being offered. You may try using on line tools that give you a sample interest rate or range based on factors you enter. The Federal Reserve interest rate serves as a good guide for how expensive credit is at any given time. You will have to prove you are very credit-worthy to receive a loan from banks that are generally scared to lend. If you have lost your job or are in a sub-prime loan situation, you may ask about federal programs to help out home buyers.

Step 2:  Check Your Credit

Before seeking a loan, you need to make sure your credit is strong. There are many services that allow you to see your credit score as reported from major agencies. Typically for a small fee, you can also see a complete report including where points were deducted. Build your credit by paying down any debt such as credit card bills or car loans. If your credit is hurting because of a one-time default, consider preparing a personal statement about this situation. By proactively explaining problems, you will appear more trustworthy to a lender.

Step 3:  Write a Budget

Getting a low fee through a mortgage refinance should ultimately result in better financial health. Take a look at your current financial health to determine what, realistically, you would like to be paying each month for your mortgage. If you are refinancing in order to receive a shorter mortgage, evaluate whether you can afford the higher monthly payment. You should look over at least a six month period and, more effectively, a year's worth of expenses and income to make an effective budget. Leave yourself some breathing room for unforeseen circumstances.

Step 4:  Look for Fees

Before paying off your current mortgage with a mortgage refinance, review the fees you agreed to when you got your mortgage. Paying off a mortgage early comes with a penalty. Assure you can afford this penalty. Review your exact mortgage contract and ask questions of your accountant, lawyer or real estate agent. In the end, make sure the fees you will incur will not outweigh the benefits of a refinance.

Step 5:  Find the Right Loan

Once you have prepared yourself for a mortgage refinance, it is time to seek the new loan. You should check with other banks in your area as well as dedicated mortgage lenders. You may find some lenders online who are offering excellent rates. Use your best judgment when you are working with on line lenders. Make sure you can speak with someone over the phone or in person. Check with ratings companies or the Better Business Bureau to determine if the company is in good standing.