If you want to change your mortgage lender, you can get a new mortgage by refinancing your existing mortgage loan. Generally, you will need at least 10 to 20 percent equity in your home before you can refinance with a new lender. Reviewing all the financial implications can help you see whether refinancing with a new mortgage lender is really what you want to do. Usually, though, the longer you’ve had your loan with the current lender, the fewer financial benefits you will get by refinancing, cautions Realtor.com, unless you can get a significantly lower interest rate.
Review your loan documents or contact your current lender to find out if you will owe a prepayment penalty for paying off your original mortgage loan early. Consider whether refinancing with a new lender will be worth the added cost of a prepayment penalty fee. Some lenders apply a prepayment fee only for the first two years of the loan; others apply it for five years. Lenders vary in how much they charge but some charge a percentage of the unpaid balance of your mortgage loan.
Contact several lenders to learn what mortgage refinance options are available to you. Generally, homeowners want a mortgage refinance deal that will get them a lower interest rate, reduce their monthly mortgage payments and save them money. Know the interest rate you currently are paying before talking to other mortgage providers. Lenders can vary as much as a full percentage point or more in the interest rate they charge, notes Erin Lantz, a mortgage expert for Zillow, in an article published on the MSN Real Estate website.
Look at all the refinancing costs involved in getting a new loan. Although actual fees and the amounts vary by lender, on average, you can expect to pay loan application, appraisal, home inspection, loan origination and title search fees. Closing costs can add up to thousands of dollars. Get specifics upfront from each lender you contact so that you can compare costs. Sometimes lenders are willing to waive certain fees to get you as a customer.
Calculate how long it will take you to recoup any fees a lender will charge you to refinance the loan. For example, if you save $150 a month on your mortgage payment by refinancing, but it costs you $3,000 to refinance, it will take you 20 months to get back that money. Based on this, if you plan to continue living in the house for more than 20 months, refinancing usually pays off, points out Bankrate.com.
Consider the additional amount of interest you could be paying by starting over with a new loan. If you’ve only had your mortgage loan for a few years, you’ve paid mostly interest with little of your monthly payments going against the principal, notes Realtor.com. One option is to take out a shorter-term loan when you refinance rather than extending the loan back out to the original term. Your monthly payments might be more but you won’t be paying as much in overall interest.
- Avoid being misled by a no-cost refinance option. While you don’t have to pay money out-of-pocket to close on the loan, you will have to pay a higher interest rate or else the lender will roll the cost of any fees it charges into the balance of the new loan.
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