Seven Steps to a Manageable Mortgage

Rising default and foreclosure numbers demonstrate how many people have become overwhelmed by their mortgage payments. There are various reasons for this, from financial setbacks to unfavorable mortgage terms. Whatever the cause, before things get to the point where you are missing payments, it's worth looking into how the situation would improve if you refinance your mortgage.

Contrary to some fast-talking radio commercials you may have heard, refinancing your mortgage is not a magic bullet--it can't solve all problems. However, your mortgage is part of your overall financial plan, and a refinance might improve your position. Here's how to see if refinancing can help.

Refinance By Numbers

To refinance successfully, you need to understand what your options are, and whether those options will solve your current problems or contribute to your investment strategy. The following seven steps will help you reach that understanding.

1. Review your existing mortgage. You are probably painfully aware of your current monthly payment, but before you can see if a refinance will ease this payment, there are other things you need to know about your existing mortgage. Key pieces of information include the interest rate, whether that rate is fixed or adjustable, the remaining balance, the remaining term of the mortgage, and the amount of prepayment penalties, if any.
2. Identify your goals. Chances are a lower monthly payment is your goal. Based on your existing mortgage, decide if you are most likely to get there by lowering the interest rate, lengthening the remaining term, adding features like an interest-only payment, or making a combination of changes. Alternately, your intention might be to stabilize payments by switching from an adjustable rate to a fixed rate mortgage. These and other goals are all legitimate reasons to refinance, but it is important that you clearly define your goal before starting the process.
3. Check your credit rating. If you've had credit problems, be prepared for the fact that this may make it more difficult, or at least more expensive, to refinance. Even if your credit rating is the same or better than in the past, mortgage underwriting standards have risen and you may have a harder time getting approved.
4. Check refinance rates. Once you have an idea of what type of loan you are looking for, check mortgage interest rates for that type of loan. Be sure to shop around because rates can vary and may change quickly.
5. Test options on a refinance calculator. The previous four steps should provide you with the variables to enter into a refinance calculator. This will tell you both whether the immediate impact on your payments is what you had intended, and what the long-term cost of the refinanced loan will be. Be sure to factor any prepayment penalty, if applicable, into any comparisons with your existing mortgage.
6. Build a budget around your refinance payments. Once you've used the mortgage refinance calculator to determine what your monthly payments would be, draw up a household budget based on those payments. Make sure you can comfortably meet your monthly obligations.
7. Approach lenders. If you approach lenders with all of the above information in hand, you will make a strong impression and be able to clearly communicate your refinance needs.

Conclusion

Just because mortgage lending standards have gotten tougher, there is no reason to be intimidated. Taking a systematic approach like the one described above will give you the best chance of meeting your refinance goals.

About the Author:
Richard Barrington has been a businessman and writer for a quarter century. Shortly after graduating Magna Cum Laude from St. John Fisher College in 1983, Richard joined Manning & Napier Advisors, Inc., a Registered Investment Advisor. Starting in an entry-level operations position, he worked his way up to become head of marketing and client service, an owner of the firm, and a member of its governing Executive Committee. His efforts contributed to the firms growth from slightly over $1 billion in assets under management when he joined, to over $12 billion in 2006. While at Manning & Napier, Richard earned the Chartered Financial Analyst (CFA) designation from the Association of Investment Management and Research (now the CFA Institute").

In August, 2006, Richard retired from the investment business to pursue a writing career. He has worked primarily as a freelance writer on a variety of business topics, while also writing manuscripts for three books.