• When you refinance your mortgage, you take out a new home loan and use some or all of the proceeds to pay off the existing one. While the process is usually less stressful than obtaining your first mortgage, refinancing is filled with complexities of its own. Understanding where to go to get your mortgage, the types of loans you qualify for, their associated rates, and the various costs to get these loans are all important. Knowing how to compare loans and costs to find the right loan for you is most important of all. Read on to how to determine if refinancing is the right step for you to take, and, if so, how to apply for a new loan.

• There are many reasons to refinance a mortgage. The most important thing to remember, though, is to only refinance if it will make sense financially over the long run. Here are some common reasons people refinance:

1. To switch from an adjustable rate to a fixed rate.
   • If you initially took out an adjustable rate mortgage, it can be wise to refinance if rates are going up.
2. To lower your interest rate.
   • If you took out a mortgage when rates were higher than they are currently, it might be helpful to refinance.
3. To consolidate debt, ease cash flow problems, or get cash from the equity in your house to use for other purposes, such as college tuition.

• Even if rates are dropping, and all your friends are running to their mortgage broker, refinancing may not make sense in your particular circumstances.

1. There are costs involved in refinancing. You'll pay fees to get your new loan, and you may owe penalties for leaving your original mortgage.
   • If you move before you've saved enough in monthly payments to make up for those fees (which can often take a year or more), you will have lost money.
2. And even if you lower your monthly payment and remain in your home, if you extend your loan term, you may wind up paying more in the long run.
   • If you can afford your current monthly payments, you could be better off paying down your current loan rather than refinancing.

• Refinancing can mean paying points and other closing costs. Some of the costs you may encounter are:

1. Points
   • Points are essentially prepaid interest to the lender. One point equals 1 percent of the amount you're borrowing.
   • The more points you pay up front, the lower the interest rate.
2. Loan Origination Fee, generally .5 - 1% of the loan.
3. Appraisal Fee
   • This may be waived if you're staying with the same lender, and your last loan was approved recently.
4. Title Search and Title Insurance
   • This protects the lender, not you. You may be offered an opportunity to purchase title insurance, at an additional fee. If you purchased it with the original mortgage, you don't need to buy it again.
5. Other fees associated with processing and finalizing the mortgage, such as recording, document preparation and copying. You may also be charged an application fee.

• Of course, you can't decide whether or not to refinance until you learn the loan terms lenders are willing to give you. You'll want to identify several potential lenders, and ask each for quotes. Make sure the loan details they provide include an interest rate, term, and all related costs.

1. You should approach your current lender about refinancing.
   1. The process may be more streamlined.
   2. They may waive some of the closing costs.
   3. You may not always get the best deal right away. Make sure they know you will be shopping around.
2. Talk to your bank.
   1. Banks you have a relationship with are already familiar with you and your credit history.
   2. If the bank holds its own loans, they may have more flexibility with terms.
3. Mortgage Broker
   • A mortgage broker has access to many different lenders and products.
   • You can find a broker by personal or professional referrals.
   1. Ask friends and business associates for the names of brokers they've worked with.
   2. Your accountant or attorney may also have suggestions.
   3. A local real estate agent will have worked with many brokers, and may be your best referral source.
      • You can find a licensed realtor in your town by searching the National Association of Realtors web site.

• Once you've collected quotes from multiple sources, you'll want to choose the best loan, by figuring out how much money, if any, each offer will save you. You can use online tools to do this, like the ones from:

1. CNN Money: Refinancing Calculator
2. Bankrate.com: Will you save by refinancing your mortgage?

• You can also do the calculation yourself, with the method outlined below.

Cash Flow Payback Period

• Once you've determined what your refinancing costs will be, you can then determine how long it will take for your refinancing to pay for itself.

1. Total the costs you will pay for the new mortgage.
2. Calculate the monthly savings on your new mortgage.
   • You'll want to reduce the monthly savings by the tax advantage you're losing with the lower interest rate.
3. Divide your costs by the net monthly savings that the new loan provides you.
4. This figure is the number of months it will take you to recoup your costs. If you will be staying in the house for at least that many months, it may make sense to refinance.

Calculation of Lost Tax Advantage

• Here's a simple way to approximate the tax advantage you'll lose when you refinance at a lower interest rate. It's not precise, but will give you a general number you can use for this analysis.

1. You'll need two numbers from your last tax return: Your "Taxable Income" and your "Total Tax".
2. Divide the Total Tax by the Taxable Income to get your tax rate. (So, if your Taxable Income is 80,000 and your Total Tax is 16,000, your tax rate would be 20%.)
3. Next you need the monthly interest portion of your current payment, as well as the monthly interest portion of the new payment.
4. Take the difference between the two, and multiply it by the Tax Rate.
5. This number is lost Tax Advantage that your new loan results in. Subtract it from your monthly savings for a more accurate assessment of the costs of your new loan.

Be Careful With the Loan Term

• One last caution: even if you're getting a lower interest rate, you may wind up paying more interest over the life of the loan if you aren't careful with the loan term.

1. For example, if you're seven years into a 30-year mortgage, and you refinance for another 30 years—you'll be paying interest for an additional seven years.
2. If your cash flow can handle it, try to keep the term you refinance for at or below the number of years remaining on your original mortgage.

• If you've decided that refinancing is for you, you'll need to apply for your new loan. The refinancing application process is pretty much the same as the original mortgage process. Although some lenders have streamlined programs that promise quick approvals, the average process takes about four weeks.

1. Many lenders will allow you to apply by phone, or online, rather than complete a paper application.
   • A paper application is still filled out, but the loan officer completes it with the information he obtained from you.
   • You'll be required to review and sign the application before the closing.
2. As part of the application process, the loan officer will request a review of your credit score.
3. You may need to provide some documents that verify your income, such as a W-2, or, if you're self-employed, copies of your tax returns.
4. An appraisal of the property will also be done.
5. Once the application is complete, the loan officer sends it to the underwriter for review.
6. If everything looks good, the underwriter will approve the loan.

1. You will probably be required to furnish ID at the closing. Make sure to bring your driver's license, no matter how well you know the lender.
2. If you have a home equity line of credit or an existing second mortgage, that you are planning to keep after refinancing, make sure to let the bank or mortgage broker know what your plans are for that debt when you apply for the mortgage. If you plan to keep it in place after refinancing, the lender will probably require you to get a subordination agreement from your existing lender as a condition of the refinancing. This can slow the process down, so make sure to flag it as an issue up front.http://realtytimes.com/rtpages/20070709_heloc.htm
3. If there is a balance due when you close, you may need to pay with a cashier's check.
4. By federal law, you have three days after you close to cancel the contract.
   1. This can be useful if circumstances change—for example, you find out you're being transferred out of state, and will be selling the house, or interest rates fall steeply.
   2. Sometimes you may discover a clause in the documents you signed at the closing that you're not comfortable with. The right of rescission means you can cancel the contract, and not be bound by the clause.

• With a real estate market that's constantly in flux, it can be hard to determine whether or not to refinance your mortgage. But if you keep in mind the costs associated with refinancing and how long your new mortgage will run, you'll be able to make the right decision for your wallet, your home, and your family.