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by Tom Stewart, Associate Editor


If you've been thinking of home refinancing but are a little unsure about how to proceed, this Guide is for you.

Home refinancing is an obvious step for you to take if you want to lower your monthly mortgage payments, reduce your interest costs, or cash out. By "cash out," I mean using your home equity as collateral for a low-cost loan which you can then use to finance other things, like a vacation, a new car, or a child's college education.

There are three steps in refinancing:

1. Find a new mortgage that gives you better terms than your current one.

2. Apply for the new mortgage.

3. Pay off your old mortgage.

Four Important Caveats

First, be aware that refinancing is just one of several ways you can tap into the equity in your home. You may also want to consider a second mortgage, a home equity loan, or a home equity line of credit. It's a good idea to talk with your broker or lender about these options before going the home refinancing route.

Second, you should recognize that there's a wide difference in the terms you can get from various lenders and brokers. It's important to not jump too fast. Shop around for your refinancing deal. Yes, you should definitely call your present lender and give them a chance to keep your business. But also apply through two or three other lenders as well. Even a seemingly tiny difference in your loan terms (such as a quarter or half point in the interest rate) can amount to a very large difference in your monthly payment or the total interest you pay, or both.

Third, beware of advertising pitches about refinancing deals that promise extremely good terms. Usually, these pitches are applicable only to people with very good credit scores (700 or above). In any case, home refinancing is a decision you should make based completely on whether it will be financially beneficial to you, as discussed below, not on what deals are out there at any given time.

Fourth, watch out for prepayment penalties. Does your present mortgage have a prepayment penalty built in? This could render refinancing uneconomical. Check this out before proceeding. And try to avoid agreeing to such penalties in your next mortgage.

The Basics

You'll find refinancing is not a lot different from the experience you had in obtaining your original mortgage. You'll have to jump through most of the same hoops all over again. Your goal, presumably, is to get a better deal the second time around. For this you'll need one or more of the following:

-A higher income than you had when you applied for your first mortgage
-A higher credit score
-A build-up of equity in your home
-A history of on-time mortgage payments

Unless you can get a better deal, forget it. You will probably incur substantial closing costs in refinancing. That is, unless you can recoup the costs of refinancing, and do so reasonably quickly, it's usually not in your best interest to refinance. (An exception would be if you absolutely need to lower your monthly payments, even if it costs you some money to do so.)

Note, however -- and this is a point a lot of people miss -- it's not necessary to get a lower interest rate. You may be able to get a better deal by switching to a different kind of mortgage, such as a variable interest mortgage, or maybe you can extend the term of the mortgage and thereby lower payments.

Unraveling The Complexities of Home Refinancing

The Internet comes to the rescue in helping to unravel the complexities of refinancing. Financial calculators are widely available which can help you quickly figure out how long it will take you to break even -- i.e., recoup your loan costs -- for a given mortgage. You can also check out mortgage rate data nationwide and get referrals to lenders and mortgage brokers nationwide.

One of the best websites for researching refinancing deals is, which is the Internet's leading financial rate information website. But in addition to any research you do at, remember it's also a good idea to discuss your specific situation and financial goals with a reputable lender/broker before signing for a new mortgage, which, after all, is one of the most important decisions of your life.

You need to sit down and figure out what specific terms you must get in order for a home refinancing package to be beneficial to you, given your specific goals. There are, as I said, financial calculators on the Web which can make this pretty painless. One is at Home Finance.

Suppose for example you now have a $200,000, 30-year, fixed-rate mortgage at 7.25 percent. Given this, your monthly payment is (as the financial calculator shows) $1,364.35 and the total interest you'll pay over the full term of the loan (30 years) is $291,166.

Now suppose you have an offer from a lender for a 6.75 percent loan for the same $200,000. That's just a half a point lower than your current mortgage. However, the financial calculator reveals that your monthly payment would drop to $1,297.20 and the total interest you'd pay would drop to $266,992. So you'd save $67.15 per month and also $24,174 in total interest paid in 30 years.

Would this amount of savings be worth the time, effort, and cost of refinancing? For most people, probably yes.

Of course, to benefit in this way, it's not necessary that general interest rates decline. You may be able to refinance and obtain a somewhat lower rate even if rates have held steady provided your own credit standing has improved or you've built up a good deal of equity in your property. Another possibility is to take out an adjustable rate mortgage that offers lower rates. This need not involve greater risk. Suppose you plan to move in three years and you can find a mortgage whose interest rate is fixed until the fourth year, at which time the adjustable rate feature kicks in. Then you don't really care -- you're selling the property at that time anyway.

Paperwork to Prepare For

Remember the big paperwork hassle it was to take out your first mortgage? The second will be a repeat performance plus one or two additional irritations. But if you prepare the documents you're going to need to get the loan ahead of time, the hassle will be greatly reduced. Here's what you'll need --

- All the following: current value of your home (the lender will arrange an appraisal to verify your estimate); amount owed on your mortgage; terms of your mortgage, including interest rate; your credit report and credit score

- Pay stubs from the last month

- W-2 forms for the past two years (or tax returns for the past two years if you are self-employed)

- Bank statements for the past two months

- Investment and IRA account statements for the past two months

- Copies of your current mortgage documents which you received at the closing

Main Points to Remember about Refinancing

-Refinance only if it makes financial sense, given your particular goals. Most people's goals involve one or more of these: obtaining a lower interest rate, shortening or lengthening the duration of the mortgage, cashing out the equity in the property.

-Shop around for the best deal. The Internet can help a lot here.

-Do your arithmetic. Use financial calculators to figure out what your break-even point is given various financial scenarios. is a good source for these tools, as well as much additional information.

-Remember that most refinancing ads are targeting extremely credit-worthy individuals (those with credit scores above 700). Average consumers usually won't qualify for the great deals they're promoting.

-Don't focus entirely on the interest rate or the monthly payment. You also need to figure out the fees involved. When comparing the refinancing deals offered by various lenders, always focus on the loan's APR, which reflects the total cost of the loan.

-Today, you can do much or all of your home refinancing-deal comparison shopping via the Internet. It's no longer really necessary to personally visit banks and other lenders, unless you are more comfortable doing it that way.

There are hundreds of refinancing businesses on the Internet. I've checked out most of the major ones, and in the For Additional Research Section (below), have described the ones I think are most likely to be of value to you.

That's it - our ten minutes are up!  (OK, maybe twelve or thirteen if you're a slow reader.) Below is a listing of Web resources to help you continue your research on home refinancing.


This Section provides reviews and recommendations of Web sites and other online resources.


No doubt you're familiar with Lending Tree from its many TV and print ads. But is it a good service? Yes, in my opinion. In fact, it's a perfect example of how the Internet has empowered consumers. It pulls together and displays vital information, based on hundreds of sources, and does it for free. For example, if your interest is in refinancing your home, you complete a single Application Form and then have that application reviewed by numerous major lenders without any cost or obligation. To start the process, go to the Lending Tree Mortgage Application Form page, then provide the information requested. A customer service toll free number is provided in case you have any questions, but basically you'll indicate your State of Residence and Purpose of Loan (choose "Refinance Mortgage"), then on the next page provide information about your property and finances. You'll receive bids from up to four major lenders. If you're considering refinancing your home or other property in today's ultratight market, Lending Tree is one of your best online research tools.


Provides up to three referrals to home refinace lenders in your area. No fees or obligation.

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