With the current financial crunch, and all of the foreclosures, those of you who are still in your house struggling to make ends meet due to the adjustment of your ARM (adjustable rate mortgage), refinancing may be your best option. Prior to refinancing, there are a few things that you’ll want to consider.

1. Are current rates lower than your existing mortgage rate?

This should be a no-brainer, but you’d be surprised how many people actually refinance just to pull some extra equity out of their homes. Another thing that should be considered when looking at the new rate is whether the amount you have to pay in closing costs will offset the savings that your new, lower rate will get you. If your closing costs are too high, it may be best to just keep your existing mortgage.

2. Where does the break-even point turn into savings?

As mentioned above, the closing cost will many times eat into your savings, but if you’re able to lower the rate enough, how long will it take to recoup the closing cost? If the closing cost will be recouped by savings in less than a year, refinancing is probably a good option, however if it will take you 3-5 years or longer to recoup your closing costs with mortgage savings, you should probably consider a few things:

  • How long do you plan to stay in your home?
  • Are there other lenders who will offer better incentives?

3. Shop around prior to selecting a refinancing option.

There isn’t just one lender out there. Make sure you shop around and have a good idea of current rates prior to selecting your refinancing option. You wouldn’t go buy a car without doing your research first, would you? In most cases, no… you’ll want to first know what other people are paying for that car, and what financing options and incentives are available.

4. Get a rate lock

This will give you time to shop around while knowing that you have a specified rate in mind. Don’t let this be verbal, get a rate lock in writing. This will specify the length of time that you have to secure the loan at a specified rate, as well as other information about the loan.

5. Get a good faith estimate

Typically, lenders will provide you with a good faith estimate after you have filled out your loan application paperwork. Good faith estimates disclose all costs and fees, and these will allow you to compare the loan to your current loan, and other potential loans.