Refinancing Considerations

(Page 2 of 2 of Refinancing Your Mortgage)

Shopping for a New Mortgage

If you're considering refinancing with a new lender, talk with a mortgage broker about your options. Get all your paperwork in order, such as paystubs, W-2s, and bank statements. If you're worried about your credit score (also called a FICO score), check it before speaking with a broker. The broker can help you explore your realistic options.

Whether or not you use a mortgage broker, be sure to shop around for the best deal when you refinance. To learn more about shopping for home loans, read Nolo's article Where to Shop for a Home Loan or Mortgage.

When Paying Closing Costs Makes Sense

If the loan you're thinking of refinancing to comes with a lot of closing costs, double-check whether it's worth it -- in other words, whether the refinance will pay for itself in the reduced interest rate you'll pay. Try Nolo's Refinance Calculator to help you figure it out.

Your calculations will tell you three important things.

First, you'll find your new monthly payment amount, which will hopefully be lower.

You'll also find your "breakeven point": how long it will take you to work off the initial closing costs by saving on interest each month. If you think you'll stay in your home for less time than it takes to reach your breakeven point, the refinance definitely isn't worth it.

Finally, you'll find out the total interest you'll owe. Starting over with a new mortgage term (most likely 30 years) means adding several months or years to your payment schedule. The more time you take to pay, the more interest you'll owe in total.

If your main objective is to lower your monthly payments, you may want to refinance even if it means you'll pay more interest over the long term. If you can later afford to increase your payments, you can refinance again, or simply pay extra to reduce the principal on your current loan. If your main objective is to reduce the overall amount of interest you want to pay, looking into a 15-year mortgage may be a good idea, depending on how favorable the rates are. (They're usually below rates for a 30-year mortgage.) If that sounds too daunting, you might simply commit to paying off your 30-year mortgage sooner, by adding a bit to your monthly payments.

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