Home Refinance

The most common question that we receive on a daily basis is, does it make sense for us to refinance? Although opinions vary greatly, there are a few key factors that will help you determine whether refinancing is right for you.

Consider the following 8 Great tips for a fast and easy Home Refinance

Home Refinance Tips

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, not for your loan officer! We never suggest dealing with a company in which you need to pay a fee to discuss your options.

Each and every one of us is an individual and thus we 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 a current mortgage statement available and a paystub for all loan applicants. Your loan consultant will need to pull and review your credit report as well as gathering other brief financial information.

Bottom line is that 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 need to discuss such items as:

  • How long do you plan on staying in your house?
  • When do you plan on retiring?
  • Do you have children and how old? 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:

A member with a 3 year old and a 1 year old is 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%.

Current mortgage payment = $1458.93
Total amount to be paid back over the next 27 years = $472,693

New 30 year mortgage payment ($250K @ 4.375%) = $1248.21
Total amount to be paid back over the next 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%) = $1833.60
Total amount to be paid back over the next 15 years = $330,048
Total Monthly increase = $374.67
Total savings over term of loan = $142,645

Which is the best 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 however 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 seems to be obvious that it would make sense for this member to refinance their mortgage.

3 - Get an estimate of your expected closing costs.

Lenders are required to give borrowers a good-faith-estimate of their closing costs. While the good faith 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, we have had 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: $325.00
Credit Report Fee: $45.00
Tax related Service Fee: $78.00
Underwriting Fee: $500.00
Flood Certification $13.50
Closing/Escrow Fee: $500.00
Title Insurance: $729.00
Recording Fees: $250.00
State Tax: $1100.00

Total Estimated closing costs: $3,540.50

Pre-payables: 30 days worth 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 $4800 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 only plan on being in the house for 3 or 4 years and it takes that amount of time to recoup the costs then you may not want to refinance.

Take a look at this example:

Example Principal & Interest Payment, 30 year Term:

Loan amount:                        $250,000                    $250,000
Rate:                                       4.375%                      6.000% 

Monthly Payment                  $ 1,248.21                    $1,498.88

Monthly Savings                                     $250.67

If it costs $4,800 to refinance, it would take just over 19 months to recoup your costs. Keep in mind that this example utilizes very 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. Very 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 received a slightly better rate than you by waiting. Chances are another neighbor waited too long and missed the opportunity all together. 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 (Cash Out) in the mortgage or simply refinance the existing balanced owed (Rate & Term)?

Like all of our 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 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:

Loan amount:                                $250,000                    $250,000
Rate:                                              4.375%                       5.500%

Monthly Payment                          $ 1,248.21                  $1,419.47

Monthly Savings                                           $171.26

Now consider adding in other debt to the same refinance:

Example Principal & Interest Payment, 30 year Term:

Loan amount:                                $300,000                    $250,000
Rate:                                               4.500%                      5.500%

Monthly Payment                          $ 1,520.06                   $1,419.47

Monthly Increase                                         $100.59

 

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:

 

Pay off                Balance                 Monthly Payment

Car loan              $14,631                           $310

Credit Card         $12,707                           $381

Car loan              $8,702                             $337

Credit Card         $7,151                             $309

 

Total                   $43,191                          $1,337

 

In the above example, the monthly payment goes up $100; however their monthly cash flow improves a net of $1,227.

7 - Be honest right from the start.

It is critical that in order for your licensed professional to give you the best advice that you let them know your complete financial situation.

Right from the start let your Homeowners Advantage lending representative know:

  • what you honestly believe your home is worth
  • the current 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, W-2s and tax returns for the last two years and your most recent mortgage statements. 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.