Refinancing 101

Refinancing a home has become more popular among baby boomers than growing a goatee, burnishing those buns of steel or getting an industrial-strength shot of Botox.

While refinancing won't make you look younger or slimmer, it might fatten your bank account, pay for a facelift for your home without increasing your monthly mortgage payments, or shorten the term of your loan -- meaning you'll own your humble abode years earlier than you might have otherwise.

Experts say that figuring out if you should refinance your home isn't as daunting a task as it might seem at first glance. (Refinancing simply means that you're paying off one loan -- your mortgage -- with another loan.)

Those same experts used to say that refinancing your home made sense if you were going to save at least two percentage points off of the rate you're currently paying. With the continuing efforts by the Federal Reserve Board to drive interest rates lower and lower in hopes of spurring an economic recovery, that conventional wisdom from the experts has evolved.

"Generally, we encourage someone to refinance if they can save at least one percent [on the interest rate they're currently paying]," said Nicole Jacobs, branch manager at Bremer Bank, 3001 Hennepin Ave. S.

Jacobs said the first thing she does when someone comes to her office to find out if they should refinance or not is to get a clear overall financial picture of them.

"We sit 'em down and find out their situation: what kind of interest rate they're paying right now, how much they have left outstanding [on their current mortgage], how long they're going to be in their home and just what kind of debt they have altogether."

She advises you to bring your mortgage agreement to the potential lender when you go to discuss refinancing, as well as documents that show your household income and debt.

If you prefer not to drive to your bank or credit union to talk over refinancing possibilities, you can determine for yourself whether or not refinancing makes sense with a little math, a little Internet surfing and a little patience.

Here are some steps that'll help you decide if refinancing is right for you:

  • Do as bankers do; in other words, assemble a financial portrait of yourself.

    That means you've got to look at those dreaded mortgage documents you'd probably prefer to see vaporized and determine how much you owe on your loan and what interest rate you're paying.

  • Look around and see what rates banks and credit unions are offering.

    Surf the Internet to compare today's rates to the rate you got from your lender when you purchased your home. Interest rates are at historic lows, so if ever there was a time to consider refinancing, this is it. Some experts also expect this window to close soon.

  • Remember, just because a lender offers low interest rates doesn't mean this is where you should necessarily take your business.

    You need to find out what sort of closing costs they'll hit you with -- this is where lenders often make up the money they lose by offering alluring interest rates.

    Ask the lender to give you a detailed report itemizing each and every closing cost you'll be incurring (typical add-on expenses include an appraisal report, escrow fee, title insurance, termite infestation report, origination fee, credit report, etc.).

    Demand full disclosure and make sure you get it -- don't allow your impatience to nail down a good interest rate hurry you into a bad deal.

  • Find out if your initial mortgage agreement includes a prepayment penalty clause.

    Minnesota is one of 36 states allowing lending institutions to penalize homeowners for paying off loans early (which is exactly what you're doing when you refinance).

    If your mortgage does have a prepayment penalty clause written into it, figure out how much it's going to cost you (these penalties are usually based on a percentage of the original loan or the balance at the time of refinancing -- the penalties typically set you back an extra grand or two).