Refinance? What to Consider

We’ve entered the homework phase of looking into refinancing.

Here are the steps to take:

1. Check our three credit reports so we know our scores. Possibly also talk to our financial planner about whether refinancing makes sense for us. (See Reasons Not to Refinance.) For us it would be the pros and cons (savings versus costs) of a move now or move later scenario.
2. Gather our pay stubs, tax returns, bank statements, and our current mortgage and home equity loan information/balances.
3. Figure out what our home is worth, based on property taxes and those periodic “this house sold in your neighborhood” mailers so lenders can figure out the “loan-to-value ratio,” or how much equity we have currently.
4. Get quotes from different lenders (All Your Worth recommends at least five.)
5. Do the math on the interest rate, points on the loan (should not exceed 1-2 percent), closing costs, origination and other fees.

Potential Gotchas:

1. Prepayment penalties. Walk away.
2. Yield Spread Premiums (YSPs), or a kickback for the broker for steering you toward a certain deal. Walk away.
3. Private Mortgage Insurance (PMI). If our down payment can’t hit 20 percent of the loan, lenders may insist on this. All Your Worth says look around for another lender, or see if the lender will waive this based on any equity built up and good credit scores. If it’s a must, then we need to factor this into shopping. If the lender utters the phrase, “single-premium PMI,” walk away. This is an up-front fee typically lasting five years that you pay even if you sell your house.

Final Step/s: Closing
Request the HUD-1 be sent the day before closing, All Your Worth advises, so we can review everything on your own time and make sure nothing has changed on the list of actual costs compared to the estimate the bank gave us. If anything has changed, All Your Worth says, don’t sign.

Get this: According to this book, which I should point out is written by Elizabeth Warren, one of the key people currently playing watchdog to the bank bailout, some lenders might actually carry two different sets of closing forms, on the off chance they can slip in some extra fees without us noticing. If we do, voila, here’s the real contract.

There’s plenty more to read online. Here’s some good stuff at Bankrate, as well as by MSN Money’s Liz Pulliam Weston.

If you’re considering refinancing, too, I’d love to hear from you! Leave a comment, or drop me a line at tips@cashonthebarrelhead.net.