Take the mystery out of refinancing your mortgage

The economy moves in cycles that periodically create opportunities for millions of homeowners to refinance their mortgages and save big money in the process.

You may be wondering whether you can refinance your mortgage and if so how to go about it. You’ve come to the right place!

You can generally refinance your mortgage if you have equity (the difference between the value of the home and the balance on your mortgage) of at least 20 percent of the value. If you purchased the home within the last two years, the lender will likely indicate that the value of the home is equal to the lesser of the appraised value or the purchase price. During and immediately following the Great Recession, many people simply didn’t have any equity in their homes and so found refinancing difficult.

Deciding whether or not to refinance your mortgage can be tricky, but many people use a reasonable rule of thumb: if you can cut your mortgage rate by 2 percentage points, say from 5 percent to 3 percent, it is worth the cost, hassle and risk.

If you are eligible for a refinance, here are the key steps.

Choose a mortgage broker

You should choose your broker carefully. The mortgage industry is rife with stories of unethical brokers and lenders who prey on unsuspecting or unsophisticated consumers. Don’t consider anyone that hasn’t been referred to you by someone you really trust.

Be sure to ask for a good faith estimate of the costs

You can’t legally hold your lender to the estimate, but it will serve as an invaluable tool to help you protect yourself at closing.

Provide all that is asked

The lender will likely ask for a great deal of information and documentation. If you resist, you only slow the process. Provide all of the information that is required quickly. If you don’t, you can’t blame the broker for taking a long time to get your loan done.

Bring a friend to closing

When you close the mortgage loan, just like when you bought the home, there will be a dizzying array of documents to sign. You’ll wonder what they all mean. No one reads all of the documents word for word at closing — because most of the documents are standard forms. It is a good idea to bring a friend who is familiar enough with the process to recognize something unusual or out of the ordinary.

Bring your good faith estimate

In order to compare the fees you are actually being charged to the fees disclosed up front, bring your good faith estimate. Some things like prepaid interest, taxes and insurance (which aren’t really closing costs at all) are difficult to predict and may vary widely from the estimate. The loan origination fee and underwriting fee — if any — shouldn’t vary at all. Don’t be afraid to ask questions about variations.

A typical mortgage refinance will cost about 2 percent of the mortgage amount (more may be charged at closing, but when that happens it is usually associated with a skipped mortgage payment that offsets the cost). Generally the costs are simply rolled into the new mortgage, meaning that you leave with a bigger mortgage than you started with. Hence the need to achieve real interest savings to get back the money you’re paying.

You should also be cautious about the maturity of the loan. If you’ve been paying on your mortgage for 10 years and get a new 30-year loan, your payments will go down dramatically, but largely because you’ve just added 10 years to your loan — which only hurts you. Consider applying for a 15-year loan instead. These usually offer lower interest rates and could accelerate the day when you get your mortgage completely paid off rather than delaying it.

Following these basic guidelines will allow you to smoothly refinance your mortgage and save thousands of dollars in the bargain.

Devin Thorpe

Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.