The New, and (Almost) Free, Way to Refinance

With a “streamlined” process, you can avoid most fees and paperwork.

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It sounds too good to be true: If you want to lower the interest rate on your mortgage, just call and ask your bank. They’ll do it for you on the spot, without charging much in the way of fees, and within a month you’ll be paying a lower mortgage.

As unbelievable as it sounds, such scenarios are playing out every day. Homeowners, especially those who have paid their mortgage on time for many months, can take advantage of the currently low interest rates just by making a simple phone call. While refinancing a mortgage usually requires thousands of dollars in fees and almost as much paperwork as buying a house in the first place, something called a “streamline refinance” can bring about all the cost-savings without the traditional fees and paperwork.

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“On a refinance with a borrower who has always made their payments on time and their circumstances haven’t changed – they have the same job, same income, and their credit hasn’t moved – you have a lot of lenders who are willing to cut back on the [refinance] process to save time and cost for everyone involved,” says Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association.

The process isn’t entirely devoid of fees –lenders will still want to run a credit check, for example – but they can skip or shorten many of the other traditional expenses. Instead of paying for an appraisal, lenders can do an automated valuation based on statistical modeling, says Fratantoni. Since lenders already know the customer has paid on time for years, then they often feel comfortable relaxing some of the other steps, he explains.

For banks’ part, they don’t want to lose good customers who are seeking lower rates. That’s why they’re willing to offer streamline refinancing. “If you’re a servicer and rates have dropped, you know your borrowers will be interested in refinancing. Even though there may be work involved for you, you’d rather keep your borrower then let one of your competitors get them,” says Fratantoni.

As for the fees involved, customers can either pay them up front, or they can opt for a “cost-free” refinance, which just means the fees are folded into future payments through a higher interest rate. But with the streamline refinance, fees are likely a fraction of the cost of a traditional refinance, which can cost around one to two percent of the loan’s value.

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The bottom line? If you’re a good customer and the current low interest rates are significantly lower than the one on your mortgage, then crunch some numbers and see if you could save money each month, even after paying the requisite fees. Qualifying for a “streamline refinance” could tip the balance in favor of making that call.

Want help deciding whether or not it makes sense for you to refinance? Check out this calculator from bankrate.com. After entering fees, interest rates, and other information, it will tell you how many months it will take to recoup your upfront costs. Bank of America also offers a slew of mortgage-related calculators.