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Step 3 of Refinance guide
Three steps to begin your refinance.
Step 1: Decisions, Decisions
Step 2: Getting Ready
Step 3: Loan Choices
Step 3: Loan Choices
Your choices now are probably just as wide as when you obtained your original loan, possibly even more so. There are fixed-rate loans of 15 and 30 years. There are adjustable-rate mortgages with varying adjustment periods. There are government loans - Federal Housing Administration (FHA) and Veterans Administration (VA) - conventional loans and jumbo loans (loans for more money than the conventional loan limit). There are loans which require private mortgage insurance (PMI) and combination first and second mortgages which eliminate the need for PMI.
What Type of Loan?
Most people favor fixed-rate loans because they like the idea of knowing exactly how much they will pay every month and that the amount won't ever change. Most people also realize that fixed loans last for 30 or 15 years. But actually, a fixed loan can be of any duration, so it's possible to switch to one that is of exactly the same term as what's left on the loan you are giving up. Realize, however, that even though rates on shorter-term loans are somewhat lower, the payments are usually higher because of the shorter payback period.
Adjustable-rate mortgages also come with 30- and 15-year terms. But more importantly, they come with a wide variety of adjustment periods. Some adjust once a year, but others have the potential to change as infrequently as every three, five, seven or even 10 years. ARMs with the shortest adjustment period come with the lowest rates, but even those that won't change for the first decade are somewhat less expensive than fixed-rate loans. The advantage of a short time frame is the lowest possible rate; the benefit of the longer one is the ability to lock-in a slightly lower rate and gain a wider window of opportunity to refinance.
If your downpayment is less than 20 percent, you'll be required to pay for private mortgage insurance that protects the lender in case you default on the loan. Consequently, to avoid PMI -- which can cost $100 or more a month, depending on a number of variables -- you can borrow no more than 80 percent of your home's current value. If necessary, you can take out up to 10 percent more of your equity with a second mortgage, and use the 10 percent equity in your home instead of a big downpayment.
Which Lender?
Start with your current mortgage company. Because of the high cost of originating home loans, most mortgages aren't profitable until they've been on the books for a few years. Consequently, some lenders will go to extraordinary lengths to keep their customers from going elsewhere. They may be willing to wave some or even all of your fees, especially if you've proven yourself to be a quality borrower by making all your payments on time.
If you are looking elsewhere, consider your local savings & loan or community bank; a local, regional or national mortgage company; or even a commercial bank. Practically everyone these days is in the home loan field, even credit unions.
You can hunt for the lowest rates on the World Wide Web, in your local newspaper or a financial magazine. Or you can hire a "mortgage broker" to look for you. Mortgage brokers don't fund loans. Rather, they handle the paperwork for finding lenders. Most brokers don't scour the entire market, either. But they usually do business with enough lenders to locate the best deals available on any given day.
The lowest rate is only part of the equation, however. Service also is important. Dealing with a lender who quotes the lowest rate doesn't do you any good if he or she can't deliver. To find a lender who's fast, honest and reliable, ask a few local real estate agents. They know who produces and who doesn't; their livelihoods depend on it.
How to Compare Loans
First, look at the APR, or annual percentage rate. This is the total charge for credit calculated on an annual basis and stated as a percentage. It includes not only your interest rate but also such one-time loan fees as discount points that increase your overall costs.
Lenders are required by law to provide this calculation to borrowers within three days after applying for a mortgage. This is one way to compare the cost of one mortgage against that of another. But there is a drawback: The figure assumes you'll hold the loan for the full term. If you pay off the loan any sooner - and most people move or refinance within seven to 12 years - your actual APR will be higher.
Because not all of the lender's charges are included in the APR, you also might want to ask the lenders you are considering to provide a list of all their closing and settlement fees and compare them on a side-by-side basis. Amounts not only vary, so do the charges themselves.
Finally, if you are considering an adjustable mortgage, lay out a worst-case scenario. Most ARMs come with annual and lifetime ceilings on increases in either the interest rate or the monthly payment to protect borrowers against what's known as "payment shock." But you still want to do the math to make sure you can handle the possibility that your loan could adjust to the maximum as quickly as legally permissible.
Three steps to begin your refinance.
Step 1: Decisions, Decisions
Step 2: Getting Ready
Step 3: Loan Choices
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