SPENDING

To get started on a refinance, check your credit.

Mortgage rates have dropped to levels not seen since 2016, and homeowners are rushing to refinance.

You can benefit even if you don’t cut your rate by a full percentage point — a rule of thumb you can safely ignore.

The question is whether you will stay in your home long enough to recoup the closing costs with savings on your monthly payments.

For a quick answer, run the numbers using the refi break-even calculator at Bankrate.com.

To get started, check your credit. The stronger your qualifications (the more equity you have, the higher your credit score and the less debt you carry), the lower the interest rate you’ll be able to get.

Rates will be higher if you take cash out, take out a super-conforming mortgage (with a loan balance of $484,351 to $726,525), or are refinancing a multi-unit or investment property.

Well before you shop, double-check your credit reports from Equifax, Experian and TransUnion, the three major credit-reporting agencies (free annually at www.annualcreditreport.com) to ensure that no errors drag down your score.

You may be able to check your credit score for free on the website of your credit card issuer, and everyone can see their credit score at Discover.com.

Shop a variety of lenders, including the originator of your existing loan; your current loan servicer, bank or credit union; Quicken Loans; or a mortgage broker who may be able to pass along wholesale rates to you. (Look for an independent broker at www.findamortgagebroker.com.)

If you need a jumbo mortgage and are a client with your bank’s wealth advisory group, it may offer you the best deal, said Adam Smith, a mortgage broker in Denver.

Lenders will typically charge you from 1% to 3% of the loan balance to refinance. Closing costs will include the lender’s origination fee, third-party costs (including the cost of an appraisal and title search) and recording costs.

You could pay the closing costs out of pocket. But before you do, consider how you could deploy the money for a better return.

If you have enough equity, you can add the closing costs to your loan balance and finance them. With rates so low, the impact on your monthly mortgage payment could be negligible.

But a higher loan balance and loan-to-value ratio could tip you into a higher risk category with a higher interest rate.

Or you could pay a higher interest rate in exchange for a lender credit that offsets closing costs.

You can use the Tri-Refi Calculator at HSH.com to estimate the difference in outcome, but your loan officer should help you make the right decision to maximize the benefit of the refi.

Once the refinancing is under way, don’t open new credit lines or increase the balances of your existing credit because lenders will reverify your debt-to-income ratios just before closing. If the ratios exceed the lender’s limit, it must requalify you.

Sign up to receive daily business news emails from The Times-Dispatch

* I understand and agree that registration on or use of this site constitutes agreement to its user agreement and privacy policy.

Send questions to moneypower@kiplinger.com. Visit Kiplinger.com for more on this and similar money topics.

Load comments

You must be a full digital subscriber to read this article You must be a digital subscriber to view this article.