9 tips for refinancing your mortgage

Refinancing was the big economic news over the past year. For most borrowers, refinancing lowered their monthly payments and freed up cash that could be spent or invested. Others
borrowed more than they owed on their home—by doing a "cash-out refinance"—and used the money to remodel or expand, buy new furniture or cars, or pay off their credit card debt.

Is refinancing the right decision for you? Probably not if you're only a few years from paying off your loan or have a relatively small balance. In those scenarios, you'd be better off sending in extra payments to your mortgage company than incurring the costs—typically 3 to 6 percent of the outstanding principal—to secure a new loan.

But if you owe a pile of money and have many years left on your loan, by all means consider refinancing even if you did so just a few years ago. In these days of low rates and low-cost loans, many homeowners are throwing out the old 2 percent rule, which said you shouldn't refinance unless your new rate would be two points lower than your old one. In fact, a dip of less than 1 point may make it worth retiring your old loan and taking a new one, depending on your needs, the equity in your home, and how long you plan to stay in it.

So before you say Yes or No to refinancing, ask a mortgage officer or broker to determine how much the new interest rate will reduce your monthly payments. Find out, too, how long it will take you to recoup the closing costs on the new loan, typically referred to as the "break even" point. (Mortgage officers are usually employees of the lender; mortgage brokers are independent professionals who work with multiple lenders.)

Or, run the numbers yourself using one of the mortgage tools at Bankrate.com ( www.bankrate.com ), HSH Associates ( www.hsh.com ), Interest.com ( www.interest.com ), or Quicken Loans ( www.quickenloans.com ). If the numbers tell you that refinancing makes sense for you, follow these tips to get the best deal:

Don't rely on published rates. "No one's going to advertise their worst product," says Keith T. Gumbinger of HSH Associates, a Butler, NJ, firm that tracks mortgage rates. "They advertise the best possible rate, which probably gets offered to only the top 10 percent of applicants."

The rate you'll ultimately receive will depend on a number of factors: the size of the loan, your credit score, the points paid (each point equals 1 percent of the loan amount), when the loan is expected to close (typically within 45 days), and whether you lock in the rate or let it "float." If you float, you're betting that rates will drop and you can lock in a lower one before the closing. Make sure you're not charged for this privilege through a "float down option," which is rarely worth the expense.

Be specific about the loan you want. The more precise you are, the easier it will be for a loan officer or mortgage broker to find the best rate. For example, do you want a 15-year or 30-year mortgage? Do you need a "jumbo" mortgage (more than $333,700)? Are you willing to pay points to reduce the interest rate? The answers to these questions will depend on several factors, including when you plan to sell the house and how soon you want to retire your debt. Only you know the answers, but the sooner you know them, the better.

Start with your current lender. If you're a good customer—you hold a sizable mortgage, pay on time, and maintain good credit—your existing lender will probably do everything in its power to keep your business. The company may cut you a break on fees for things like appraisals, surveys, and inspections if the information is current and you meet other requirements.

If you decide to shop around, ask your colleagues or one of your advisers for recommendations. Be cautious about using lenders you haven't heard of. Before you send a lender any money or personal information—especially your Social Security number—call your state's division of banking to see if any actions have been taken against the lender. "I average about one call a month asking me to help with botched situations involving Internet lenders or new companies or mortgage brokers," says Steve Austin, executive vice president and chief operating officer of Bank South, in Tulsa, OK.

Resist "no cost" refinancing. No cost doesn't mean free. On the contrary: The closing costs are usually bundled into the new mortgage, which means you pay interest on them. The fees associated with a 30-year mortgage could cost you more than double what they would have had you simply written a check for them at closing. Or, if the costs aren't bundled in, you'll be charged a slightly higher interest rate. Either way, the lender wins. "No one's giving away anything," says Gumbinger.

But don't avoid refinancing just because you can't pay the closing costs in cash. If rates have dropped enough, you'll probably still come out ahead, even with a "no-cost" loan. Just do the math first.

Ask for the reissue rate on your title work. If you've taken a mortgage within the past two years, or are using the same lender, you might be granted this option, which can save you as much as 70 percent on your title work. An editor at this magazine didn't know about this potential savings when he refinanced his mortgage; fortunately his lawyer did. The savings more than covered the attorney's fees. However, if it's been several years since you took out a home loan, or if you're using a new lender, you'll likely have to pay for a new title.

Make sure the new title is correct. The fact is, most people never see their deed before it's recorded at the county court house, says Gumbinger. He recommends that you ask the lender if you can review the title to the property before it gets filed, so that you can make sure it's correct.

This is especially important if you're refinancing property that's held in a trust. You have to make sure that the title company issues the new deed in the trust's name. According to Lee R. Phillips, an attorney in Orem, UT, the mortgage company may take the property out of the trust and transfer it to either you or your spouse. If that happens, you'll have to ask the title company to reissue the deed directly in the trust's name after the loan closes, Phillips says. But if you catch the mistake beforehand and raise a fuss, the mortgage company will likely correct the title before closing.

Don't escrow taxes and insurance. Unless you're undisciplined, avoid putting monies in escrow to cover your property taxes and homeowner's insurance. There's usually a fee for this privilege that runs under 1 percent of the loan amount, in states where it's allowed. "Paying the fee will allow you to time your tax and insurance payments to your benefit," says Bank South's Steve Austin. For instance, you may be able to prepay taxes that are due next year and use those payments to reduce your current tax bill. Moreover, you get to hang onto your money longer. That may be an advantage when interest-bearing accounts start paying more.

Carefully review the estimated closing costs. If you decide to lock in the rate, the lender will send you a "good faith estimate" of your closing costs within three days. Go over the numbers carefully, and compare them to the ones that appear on the final settlement statement (the HUD-1) from your previous mortgage. "It's reasonable to expect that you'll pay similar fees," Gumbinger says. "At least you'll have a good idea of what should or shouldn't be included in the total closing costs."

If you don't like something you see, call your lender or broker immediately and ask for an explanation. Many of the fees are negotiable, especially if you're keeping your business with the company that holds your existing mortgage. If your lender won't budge, ask that your file be "pulled"—this essentially says that you're threatening to take your business elsewhere. Yes, you risk giving up the locked-in rate, but your expenses will be nominal at this stage. In fact, before you apply with any lender, ask its loan officer or your mortgage broker if any required up-front fees are refundable.

Give yourself plenty of time to close. With most refinancings, your file is turned over to a closing or title company, which dictates the closing details. Like the lenders themselves, these firms are swamped when interest rates are low. Moreover, appraisers get backed up and can be difficult to schedule. So don't expect the closing to happen as quickly as anyone promises.

The key is to allow adequate time to close the loan before the rate lock expires. Many lenders give you only 30 days. To be safe, shoot for 45 to 60. If mortgage rates are low, it'll be worth it to pay the one-eighth or one-quarter of a percentage point that some lenders will charge to extend the commitment period.

"You wouldn't recruit new partners or change office locations in 30 days or less, so avoid the urge to close on your home in such a short time frame," Austin says. A friend of his, an orthopedic surgeon, thought he was doing the right thing by attempting to close within 14 days. "It simply wasn't enough time to fully address all of the various contractual and financing issues," Austin recalls. "Somehow we pulled it off, after lots of rushed calls to attorneys and a three-hour closing on Thanksgiving Eve."