How to Refinance: Shopping for Your New Mortgage

By Karen Lawson
Local Lender Columnist

You know why and how to refinance, and are ready to start shopping for a great deal on refinancing. Now, look at the loan's APR.

Understand Your Rate and Term before You Refinance

The annual percentage rate (APR) advertised by lenders includes lender fees, points and other charges in addition to the interest rate. The APR's disclosure is mandated by the Federal Truth in Lending Act (TILA) and is a better way to compare programs--for instance, is a 5.5% loan costing 2 points a better deal than a 6% mortgage with no points? Comparing their APRs, which take the points into account, can help you decide. Everything else being equal, the lower APR is the better buy. Compare APRs among several loan products and lenders to find the least expensive refinance loan.

Before any major financial decision, it's critical do to your homework. Refinance terms can harm instead of help your financial security if you don't know when and how they can change. Read your loan documents carefully, especially any "riders" or extra documents spelling out ARM adjustment details or prepayment penalties. Ask questions, but remember that you are responsible for anything that you sign. Be sure that you understand all terms before committing to a new loan.

Points and Fees Add to the Cost of Refinancing

Don't unwittingly pay extra costs and fees. Some lenders may promote low interest rates, but then charge additional loan fees and costs. Again, it's important to pay attention to the APR of any potential mortgage loan. You may be quoted a rate that includes "points." A point is equal to one percent of your new loan amount. If you borrow $200,000, one point would be $2000. Sometimes paying points to lower your rate makes sense, depending on how much it lowers your rate and how long you anticipate having that loan. If you have bad credit, you might have to pay points and a higher rate to be approved for a loan. It's best to compare loan options, and to know exactly what you will be paying to refinance before agreeing to it. Knowing the terms of your refinance now can prevent problems later.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

Back