6 things to consider before refinancing

Perhaps you’re a homeowner in need of some quick cash.

Maybe you want to consolidate your debts so you have better control of your money.

Perhaps a lender is urging you to refinance because interest rates are low, and he has a too-good-to-be-true deal that will shorten your current loan’s term.

Here are 6 essential questions to ask yourself before making the decision to refinance.

1. What’s My Motive—and What Will It Cost Me?
Before you even consider a refinance, ask yourself this fundamental question: “Why do I need it?”

“Many times, people take out a new, larger loan to pay off credit cards, automobiles or even to purchase another home,” says Norm Bour, host of the nationally syndicated U.S. radio program The Real Estate & Finance Show, and an experienced mortgage lender. “Sometimes they need the money to do home improvements or renovations.”

If, however, you want to lower your current loan payments or switch to a different type of loan, you must calculate the benefits before going the re-fi route.

“If someone is going from a fixed loan to another fixed loan, my general benchmark is to see a 1% reduction of interest rates to justify it,” says Bour, who also teaches money-management classes in Southern California. “Sometimes the borrower goes from a fixed-rate loan to an adjustable to lower his payments. Sometimes he does just the opposite—maybe to get away from interest-rate volatility. These are very personal decisions, specific to each individual client.”

2. How Long Will I Be in the Property?
You may already know—or suspect—that you will not live in your current home beyond a certain timeframe (perhaps 5 years). If this is the case, why would you even consider a 30-year loan?

“Sometimes, an adjustable-rate loan or a ‘hybrid’—say, a 5-year fixed, then converting to an adjustable—makes the most sense,” Bour says.

3. What Am I Worth?
Do your homework before trying to qualify for a new loan. You should know:

• The approximate market value of your property, as “loan to value (LTV) is one of the primary factors that control interest rate,” Bour says.
• Your credit score, which will affect your overall ability to secure a loan, as well as the interest rates offered and the options available to you.

4. Do I Have a Competent Loan Officer?
In certain cases, refinancing may not yield “a monetary savings, per se,” Bour says. This means there must be “compelling reasons” to secure a new loan, he emphasizes.

“A good loan officer will ask a series of questions to help the borrower identify his best option,” Bour says. The officer should:

• Assess your current monthly cash flow and potential future risks.
• Calculate your monthly savings if you were to refinance.
• Determine how long it will take you to break even.
• Fully explain the different types of loans and interest structures.
• Disclose all closing costs and “hidden” fees (origination fees, escrow, title, underwriting, interest, taxes, insurance, prepayment penalties, etc.).
• Treat you with respect and as an individual—not come up with a one-size-fits-all, cookie-cutter approach to your financial future.

5. Do I Need a Second Opinion?
Because lenders have an interest (pun intended) in having you sign on the dotted line, it’s often worthwhile to seek advice from a certified financial planner or other expert who has no investment or agenda when it comes to your refinancing decisions—especially if you’re a first-timer who lacks fluency in real estate issues.

Accept your limitations, and have enough smarts to ask for help. A lot of money is riding on this decision, so never let pride get in the way of making the right choice.

6. Will This Hurt My Credit Rating?
“While refinancing, in and of itself, will do very little damage to credit scores, what will cause harm is excessive shopping amongst too many lenders,” Bour says. “Each time a credit report is pulled by a ‘potential grantor of credit,’ it shows up as an ‘inquiry’—and each inquiry drops the credit score by a little bit.

“In the United States, the laws have changed over the past few years, and inquiries do not have the same negative impact as they used to. Most credit bureaus will now look at a ‘cluster’ of inquiries over a short period of time as being one inquiry.”

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