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Save Big On Your Refinance

Ways to Save on a Refi

Alamy

It could be the right time for you to refinance — but make sure to take the right steps to prepare first.

En español | Refinancing your mortgage is like picking low-hanging fruit when rates are low because you can easily save money on monthly payments.

If you're among the 4.4 million retired homeowners with mortgage debt, or expect to be one in the future, the savings can help provide a more comfortable retirement.

Get more financial management tips in the AARP Money Newsletter

The good news is that mortgage rates have continued to remain low over at least the past two years. The average rate on 30-year fixed-rate mortgages has declined from a recent peak of 4.5 percent at the end of 2013 to 3.5 percent, according to Freddie Mac.

While rates may climb a bit, they are unlikely to escalate dramatically and are expected to remain at relatively low levels.

That means you can still save quite on bit on your monthly payment, particularly if your current rate is at least 1 percent higher than the best rates now. But you need to choose your lender and the type of mortgage carefully. Here's what to do:

Check your credit record. Keep in mind that your credit score will determine your ultimate mortgage rate. The highest scores net the lowest rates, so check to see that your credit report is accurate before you apply for a loan. You have a right to correct any mistakes on your report, and that could then boost your credit score and ultimately lower the cost of borrowing. You can obtain free credit reports (once a year) from annualcreditreport.com/index.action.

Decide what you want. Before you even look for rate quotes, know what you want to do. Are you looking to pay off your mortgage by a certain year? Then you should shop by term (length of loan). The most common flavors are 15-year and 30-year loans, but you can pick any term (typically in five-year increments) you need to "amortize" based on your financial goals. You also need to know the advantages of the different kinds of loans.

Adjustable-rate loans (ARMs), for example, have lower upfront rates, but your monthly cost can go up (or down) depending on the direction of future interest rates. If interest rates go up, you pay more. If you want to lock in a set payment, a fixed-rate loan is better than an ARM. But if you know you'll only be in a home for a few years, then an ARM might serve you better.

Check out the mortgage search engines at nerdwallet.com. Also worth considering is mortgagemarvel.com. For general education, Mortgage Professor (mtgprofessor.com) is highly informative. Real estate sites like Zillow.com will quickly connect you with lenders while giving you property estimate ranges.

Choose the right term. This is a matter of simple math. The shorter the term, the higher the payment and the quicker the payoff. You also save on total interest costs with shorter, fixed-rate terms. Know what size payment you can afford and pick the loan best suited for your objectives.

On a $100,000 loan at 3.5 percent, a 30-year loan payment will be $449 a month. You'll pay off the loan in 2046, but pay more than $61,000 in interest over that period. The same borrowed amount over 15 years will result in a $715 monthly payment, but tallying about $28,500 in total interest.

Your decision on choosing the right term should be based on what you can afford and your cash flow needs in retirement. There's no shame in carrying a mortgage into retirement — 30 percent of all homeowners 65 and older do — you just need to calculate how much a mortgage will help you in either boosting your spending or saving power.

Approach your current lender first. Although this is not a hard-and-fast rule, the bank servicing your current mortgage may be able to refinance at a lower cost than competitors. After all, they want to keep your business. "Refinancing with a current lender may not involve an appraisal, which could be streamlined, cheaper and faster," notes Holden Lewis, a mortgage analyst with Bankrate.com. But don't assume your present lender will always offer you the best deal. Shop around to see how they compare.

Reduce closing costs. Most borrowers choose to "roll in" their closing costs into their mortgage balance. While that saves you from paying a cash outlay upfront, you're adding to what you owe over time.

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How do you know if you're paying too much in fees to lenders and third parties? On average, you'll pay about $2,000 in closing fees on a $200,000 home, according to bankrate.com. Look carefully at each lender's three-page loan estimate for the section labeled "Services you can shop for." Those generally include things like title insurance, settlement agent services and pest inspection. You may be able to save some money on third-party services such as title insurance by shopping for them yourself.

Read the fine print. Although loan offers may not vary much, you have to watch out for charges that can come and bite you. If you don't have enough equity in your home, for example, you may have to pay for private mortgage insurance, which will add to your total cost. To avoid this additional expense, you need to have at least 20 percent equity in your home, according to bankrate.com. This may not be a problem if your home has increased in value since the last time you financed a mortgage. There may be a catch, though. Some loans may require that you wait at least two years — a "seasoning requirement" — from your last financing to avoid PMI. A good mortgage broker can walk you through the details.

Also be aware that lenders scrutinize retirees closely because their income may be lower than when they were working. To determine if a retiree is a good risk, they'll take into consideration what's in the borrower's retirement kitty before they'll green light a mortgage.

Approach your current lender first. Although this is not a hard-and-fast rule, the bank servicing your current mortgage may be able to refinance at a lower cost than competitors. After all, they want to keep your business. "Refinancing with a current lender may not involve an appraisal, which could be streamlined, cheaper and faster," notes Holden Lewis, a mortgage analyst with Bankrate.com. But don't assume your present lender will always offer you the best deal. Shop around to see how they compare.

Reduce closing costs. Most borrowers choose to "roll in" their closing costs into their mortgage balance. While that saves you from paying a cash outlay upfront, you're adding to what you owe over time.

How do you know if you're paying too much in fees to lenders and third parties? On average, you'll pay about $2,000 in closing fees on a $200,000 home, according to bankrate.com. Look carefully at each lender's three-page loan estimate for the section labeled "Services you can shop for." Those generally include things like title insurance, settlement agent services and pest inspection. You may be able to save some money on third-party services such as title insurance by shopping for them yourself.

Read the fine print. Although loan offers may not vary much, you have to watch out for charges that can come and bite you. If you don't have enough equity in your home, for example, you may have to pay for private mortgage insurance, which will add to your total cost. To avoid this additional expense, you need to have at least 20 percent equity in your home, according to bankrate.com. This may not be a problem if your home has increased in value since the last time you financed a mortgage. There may be a catch, though. Some loans may require that you wait at least two years — a "seasoning requirement" — from your last financing to avoid PMI. A good mortgage broker can walk you through the details.

Also be aware that lenders scrutinize retirees closely because their income may be lower than when they were working. To determine if a retiree is a good risk, they'll take into consideration what's in the borrower's retirement kitty before they'll green light a mortgage.

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