8 Home Refinance Tips
Answers for the common question: Does it make sense for us to refinance?
Although opinions vary, there are a few key factors that will help you determine whether refinancing is right for you. Consider the following 8 tips for a fast and easy home refinance.
1. Talk with someone you trust
The best strategy is to start by talking with a licensed professional at an institution that you trust. If refinancing does not make sense, you want to make sure you are dealing with someone that will give you honest advice.
The key is to find out if refinancing is right for you. Don’t deal with a company that asks you to pay a fee to discuss your options.
We all have individual financial situations and needs. Plan to spend at least 15 minutes with a licensed loan officer on the phone to discuss your scenario. When possible, be prepared by having your current mortgage statement available and a paystub for each loan applicant.
You should not feel like you are in a used car dealership when discussing the possibility of refinancing or applying for a home equity loan.
2 - Consider your long- and short-term goals
Discuss your goals for the next 5, 10, or 15 years with one of our licensed mortgage professionals. We will be able to craft a refinance strategy that works specifically for you, including type of mortgage and term.
For example, we discuss such items as:
- How long do you plan on staying in your house?
- When do you plan on retiring?
- Do you have children? How old are they? College bound?
- Have you had any or do you foresee any significant career changes coming?
- Do you have extra disposable income? (This may allow us to shorten your term.)
- Do you have other debt? What kind and what are the rates?
Consider the following example:
Members with a children ages 3 and 1 are considering refinancing their mortgage. They have 27 years left on their existing mortgage of $245,000 (original loan amount was $250K) and are paying 5.75% interest.
Current mortgage payment = $1,458.93
Total amount to be paid back over the next 27 years = $472,693
New 30-year mortgage payment ($250K @ 4.375%) = $1,248.21
Total amount to be paid back over 30 years = $449,355
Total monthly savings = $210.72
Total savings over term of loan = $23,338
New 15-year mortgage payment ($250K @ 3.875%) = $1,833.60
Total amount to be paid back over 15 years = $330,048
Total monthly increase = $374.67
Total savings over term of loan = $142,645
Which is the better option for this member? It depends on the individual. Obviously, the member would save the most by choosing the 15-year mortgage; however, their monthly cash flow would decrease due to the higher payment. The mortgage would be paid off by the time their oldest child was possibly preparing for college. By choosing the 30-year option, our member would improve their monthly cash flow that could possibly be invested into other assets. In either case, the data suggests that this member would benefit from any type of refinance.
3 - Get an estimate of your expected closing costs
Lenders are required to give borrowers a loan estimate of their closing costs. While the loan estimate summarizes costs, we suggest getting a complete breakdown of costs on an initial fees worksheet. When reviewing your breakdown, keep in mind that some lenders name their fees differently. For example, borrowers tell us that they are being quoted a rate with no points (a point equals 1% of the loan amount) only to find out that they were being charged a 2% origination fee.
The following sample is from an actual initial fees worksheet of a $150,000 loan in Saratoga County:
Appraisal Fee: $325
Credit Report Fee: $45
Tax-related Service Fee: $78
Underwriting Fee: $500
Flood Certification $13.50
Closing/Escrow Fee: $500
Title Insurance: $729
Recording Fees: $250
State Tax: $1,100
Total estimated closing costs: $3,540.50
Pre-payables: 30 days of interest $523.97 ($17.4658 per day)
4 - Understand the cost-to-benefit ratio
Figure out how long it will take to recover your closing costs. Utilizing simple math, if the cost of refinancing is $4,800 and you are going to save $240 per month, it will take you 20 months to recover the costs. Now, remember the important questions that were asked in Tip 2 (consider your long- and short-term goals); if you plan on being in the house for only 3 or 4 years and it takes that amount of time to recoup the costs, then you may not want to refinance.
Look at this example:
Example principal & interest payment, 30-year term:
If it costs $4,800 to refinance, it will take just over 19 months to recoup your costs. Keep in mind that this example utilizes simple math. When reviewing your individual scenario, you would want to take several items into account, such as how many years do you have left on your existing mortgage and are you paying off any other debt.
5 - If the loan makes sense to you today, don't be greedy
When you are shopping around for a mortgage and it makes sense to refinance, don't wait around for the market to potentially improve. Lock in that low rate as soon as possible. If you wait too long, you may lose out.
Ask an expert that picks stocks and they will tell you that it is almost impossible to time the markets. Few people buy at the absolute low and sell at the absolute high. If it makes sense to refinance now, you need to be comfortable with the fact that your neighbor might receive a slightly better rate than you by waiting. Chances are that another neighbor waited too long and missed the opportunity. Lock in and feel good that you have improved your financial situation.
6 - Know what debt should be included in your refinance
When refinancing, should you include other debt (known as “Cash Out”) in the mortgage or simply refinance the existing balanced owed (known as “Rate & Term”)?
Like other answers, it depends on your individual circumstances. If you are carrying a lot of debt (especially high-interest debt) then normally it makes sense to attempt to roll that into a low-interest rate, possibly a tax-deductible loan. You may want to leave out low-interest rate and short-term debt.
Keep in mind that interest rates may vary depending on the type of mortgage that you apply for (Rate & Term vs. Cash Out) and that you will more than likely be limited to 80% of the value of your home on a Cash Out refinance.
Consider our example from earlier with the member currently having a better rate:
Example principal & interest payment, 30-year term:
Now consider adding in other debt to the same refinance:
Example principal & interest payment, 30-year term:
Consider what taking $50,000 cash out to pay off other debt can do to help your monthly cash flow with this real-life example:
In the above example, the monthly mortgage payment goes up $100; however, their monthly cash flow improves by a net of $1,227.
7 - Be honest right from the start
It is critical that you let your licensed professional know your complete financial situation so that they can give you the best advice. Right from the start, let your Homeowners Advantage lending representative know:
- what you honestly believe your home is worth
- the status of any home improvement projects
- the number of units in your home
- if the home is not your primary residence
- about any lapses in employment in the last 2 years
- any credit issues
8 - Collect your financial information
If you are considering refinancing, collect your current paystubs, most recent mortgage statements, W-2s, and tax returns for the last two years. Also, do not throw away any financial statements until your loan is complete. Most importantly do not take out any new debt just prior to or during the refinance process.
