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4 things to consider before refinancing your home

What to know before you sit down with a banker

Mortgage applications are ticking up as mortgage rates sit near historic lows. By year's end, the Mortgage Bankers Association (MBA) projects that $1.663 trillion will have been funneled into home loans. Refinanced mortgages are expected to account for 41 percent of the total.

There's good reason for that. Low rates—as little as 3.76 percent on a 30-year fixed mortgage—can help reduce monthly payments, fund a remodel or reduce higher-interest debt. If that's enough to interest you in refinancing, here are four things to think about before you sit down with your banker.

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1. Correct credit errors

The more creditworthy you are, the more likely it is that you'll get the deal you want.

"The higher your score, the lower your interest rate will be," says Heidi Barnes, a Sacramento, California-based loan officer with 18 years experience.

Maximizing your score means correcting errors before you apply to refinance your mortgage. Barnes advises using to order free reports from every bureau that keeps records on you. Federal law grants you one free copy per bureau, per year.

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2. Get specialized help when choosing a lender

Most bankers and mortgage brokers will be able to help you get started with a refinance, but be sure to choose one who specializes in the process, as well as the nuances of your community. He or she can be a valuable source of insight and perspective on home values as well as find you a good rate.

Another trait to avoid—someone who appears distracted or isn't fully committed to the process. Anders Bylund, an Odessa, Florida-based writer, found this out when his agent balked in the middle of refinancing. The loan officer started out enthusiastic and helpful, but that only lasted for a week or so, Bylund says. "We made two appointments to meet and the officer never showed up. Once might be forgivable, but twice? That's not how you do business," he says.

Barnes says these sorts of situations are rare, and they almost never happen when working with someone who's taken the time to get to know you. The best are also advocates with underwriters who may have tough questions to ask about your financial situation.

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3. Prepare for an appraisal

Even the best banker can only do so much; put in the time and effort to make your home look as if it's worth the deal you're seeking. Messy or unfinished homes can appraise for less than their true value, Barnes says.

"When an appraiser comes in they're going to turn on everything to see if it works," Barnes says. Most cosmetic fixes won't matter. But if you've started work on a bathroom and it's still not finished by the time the appraiser shows up, expect to take a hit.

Also, don't trust Internet sites to provide an accurate barometer of your home's value. Barnes says these services are "much more accurate" than they used to be, but estimates are likely to be off by at least 20 percent.

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4. Do the math

Finally, before you apply, Barnes advises you do the hard math of figuring out the potential return on your refinancing. The equation itself is simple. Just take the estimated monthly savings from refinancing and then divide it by the fees and closing costs you're paying to get those savings. So, for example, you'll need two years to break even on a refinancing that saves you $200 monthly but costs $4,800 to close. (4800 / 200 = 24 months, or two years.)

Refinancing in that situation could be worth it if you expect to be in your home for at least another two years. If not, you'd just be throwing away money. Barnes says a good mortgage broker should be able to run the numbers, or you can do the work yourself using Chase's refinance calculator.
