What to Look for When You Refinance

Home refinances can be particularly rewarding and helpful for families, particularly when they help a family save money on interest or assist them in paying off their homes more quickly. When considering a home refinance, make sure that you understand the terms and conditions of your new loan, from the interest rate to the way property taxes will be collected. Take the time to make sure you understand these factors before agreeing to your refinanced mortgage:

Good Faith Estimate: Your lender should provide you with a Good Faith Estimate for your new loan, which is essentially a list of all the fees, expenses, overall costs and format of your new mortgage. Carefully look over the estimate and ask questions if something is difficult to understand.
Interest rate: Is the proposed interest rate of your refinanced mortgage higher or lower than your existing mortgage? As a rule of thumb, you should think twice about refinancing a loan at a higher rate - unless serious extenuating circumstances make it necessary.
Term: Is the term of your loan changing? If you make your monthly payments only - with no extra principal payments - when will you pay off your loan? You may want to find out how much it would cost to have a 15-year term instead of a 30-year term.
Prepayment Penalty: Does your refinanced mortgage carry a prepayment penalty? Make sure you understand this before taking out the loan; most homeowners like paying a little extra over time to more quickly pay down the balances of their mortgages.
Closing Costs: Carefully review your closing costs. Are they correct? Are there charges you don't recognize? How many points are you paying - what would happen if you wanted to pay fewer points? Realize that your closing costs are either adding to the balance of your mortgage, or costing you in out-of-pocket-expenses immediately.
Escrowed Taxes: Does your loan collect money in an escrow account for your property taxes, or will you be responsible for paying taxes independently? Depending on where you live and your lender, your loan might not escrow taxes - which means you need to save independently over time.
Monthly Payment: What is the estimated monthly payment of your refinanced mortgage? Will it ever change? If your refinance proposal is for an ARM (adjustable-rate mortgage), you need to understand how your monthly payments will change over time. Make sure you are comfortable with your anticipated monthly payment.
Credit Score: Your credit will directly affect the types of loan programs made available to you. As a rule of thumb, you should aim to have a credit score of 700 or higher to receive preferable interest rates. You may want to check your credit report and score before starting the refinance process to make sure your finances are in good standing.
Debt/Equity Ratio: Ideally, you should aim to owe no more than 80 percent of your home's value. When you refinance, take the time to review how much you owe and compare it to the estimated value of your home. If you owe more than 80 percent of the home's value, you may be asked to pay "mortgage insurance" each month.