mortgage

5 steps to a successful refinance

Step 3: Shop several lenders 

Everybody wants a new loan that matches their needs at the best terms and is offered at a reasonable cost. That means finding the right lender.

If you were satisfied with the firm that provided the loan you have now, start shopping with your current mortgage provider, suggests Barry Zigas, director of housing policy for the Consumer Federation of America in Washington.

"If you tell them you want to refinance, they may not want to lose your business, and will cut costs," he says.

Also, consider shopping around to see what other lenders are offering. When shopping for a loan, check with different types of lenders, including banks, credit unions and mortgage brokers. The more you compare rates and closing costs, the more confident you'll be that the loan you decide on is fair, says Saunders.

Remain suspicious of any lender that comes to you unsolicited. Such offers could be scams, says Kathleen Day, spokeswoman for the Center for Responsible Lending in Durham, N.C.

"Any time (lending companies) contact you, it's a red flag," Day says.

Today's declining housing market may make it more difficult to qualify for a loan. Because home prices have dropped, appraised values may pose a problem now, Short says.

For instance, a homeowner who paid $250,000 for a home and took out a $215,000 mortgage may find that a new appraisal indicates the home value has sunk to $230,000. In this situation, a lender may be unwilling to provide a new $215,000 loan, which would be more than 90 percent of the home's $230,000 value.

Lenders are leery of mortgages within 5 percent or 10 percent of home value, fearing prices could drop even further until the loan wouldn't be fully backed by the home price. You can use Bankrate's handy calculator to find out how your home's value stacks up against your mortgage loan.

A mortgage insured by the Federal Housing Administration may be the only viable option for homeowners in this situation, says Short.

Call lending companies and ask if they offer FHA loans. Not all firms do, but more lending companies are becoming FHA-approved, with some 12,500 nationwide with 25,000 branch offices now offering the loans, says Lemar Wooley, a spokesman for the federal Department of Housing and Urban Development, which oversees FHA loans.

Step 4: Ask about all fees 

When you take out a mortgage, you incur a host of small fees known as closing costs. These can easily tally $2,000 or more. So it's crucial to ask all prospective lenders for a detailed breakdown of these fees.

Within three days of applying for your mortgage, law requires that you receive a "good-faith estimate" of these charges, explains John O'Brien, chairman of the Illinois Real Estate Lawyers Association.

However, you should expect the lender to give you specifics on all costs before you pay a couple of hundred dollars in a loan application fee, Saunders says.

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Charges associated with a new mortgage include the application fee, credit check fee, appraisal fee, origination fee, document processing fee and underwriting fee. Other charges may go by various names, including copying fees, broker fees and yield spread premiums.

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