With mortgage rates at historic lows, refinancing is a hot topic – sizzling hot, like Michigan in August hot. If you haven’t refinanced your mortgage recently, I strongly recommend you take advantage of the rates and refinance your mortgage (if it makes sense only!!) before the Fed starts to meddle and you find yourself full of churning regrets. One of my friends recently saved $200/mo off her mortgage payments – that’s $2400/year or like one ticket to Disney World!
As a disclaimer, I’m not a financial planner, lender, mortgage broker or any other such thing so my knowledge is based on my personal experience, interfacing with clients and lenders and my own research. Ask lots of questions and make sure you really understand as you work through the refi process.
Reasons to Refi
There are some good reasons to look at refinancing your home. Do any of these reasons apply to you?
- Lower your monthly mortgage payment — This reason is usually at the top of your list for obvious reasons. More money in your pocket each month and less money to The Man.
- Change the terms of your mortgage for more equity — If you’re currently on a 30-year mortgage, switching to a 15-year mortgage can amp up your equity and reduce your overall interest over the life of the loan.
- Change the terms of your mortgage for more cash flow — If you bump from a 15-year to a 30-year mortgage, you reduce your payment and free up cash flow to meet current needs.
- Switch from an ARM to a fixed rate for more stability — For the love of all that is holy, lock in these kick-ass long-term rates right now if you are in your home long-term! If you are in an adjustable rate mortgage (ARM), think hard about whether now is the time to lock in a great rate long-term.
- Ditch the PMI — If you are currently required to pay Private Mortgage Insurance (PMI), that’s money out the window. If you have 20% equity in your home, a new loan can eliminate PMI because a refi is based on your equity at your home’s current appraised value, NOT the appraised value when you bought it. In a hot market, the value of your home has probably increased since you took out your existing mortgage.
Understand the Process
Refinancing can be confusing because, hey, banks or lenders are involved and they have to adhere to all those sticky government rules put into place after the last housing crash. There was never going to be a scenario where it was straight-forward. I’ll break it down the best I can.
Start with a Little Financial Soul Searching
Lenders look to your larger financial picture to determine whether or not you are a good risk for them to extend you money. They are going to dig around in your personal finances to make this determination, so you want to make sure your house is in order before you make the first call.
What lenders are looking for:
- Good credit score, usually a 620 or above
- At least 20% equity in your home at its current value (equity = home value minus your outstanding mortgage/debt on the home)
- Sufficient regular income to allow you to comfortably make your payments each month
- Asset reserves (e.g. savings or stock accounts) to cover your loan fees and prove you have some backup funds in addition to your income
- No overdue payments, liens on your home or other red flags
Lenders are going to throw around lots of terms like “loan-to-value ratio” and “debt-to-income ratio.” These are formulas the lender is required to run to ensure you meet their requirements for lending and they are able to refinance your mortgage. The lender can explain these in greater detail.
Shop Around
You’ll want to talk to a few lenders to see who is offering the best terms, including the rate and cost of the loan. It is imperative that you do this within about 24-48 hours because rates can change daily and if you allow a hard credit pull, you want those pulls to be like little ducks lined up in a row so they all show as one blip on your credit report.
Remember, these lenders make money off your transaction, so let them woo you with great rates, great terms AND low cost. All these lenders provide you with a standard form showing the terms and cost of the loan. The standard form allows you to compare the offers with each other to select the one that is best for you.
Even if you aren’t sure if you will qualify, it is worth a few calls to check. The lenders can give you an idea of whether your will qualify even without pulling your credit.
I refinanced our mortgage in February 2021 and we refinanced into a killer rate even though our income had dropped since purchasing our home. (FYI, killing your corporate-America persona also unfortunately kills the income that goes along with her.) Our break-even timeline was something like 14 months, well within our plans to stay in our home and start to reap the benefits of the reduced payments.
Compare the Terms, Costs and Break Even Timeline
People tend to get so excited when they see their payment is going to drop that they forget to factor in the costs of the loan. You need to review your savings per month against the cost the lender is charging you to refinance.
For example, if you payment drops $100/mo but it costs you $3000 up front to complete the refinance, that’s not worth it if you’re going to move in the next two years. If you save $100 x 24 months = $2400, you actually ended up $600 in the hole to refinance, which is no benefit to you. Do you catch my drift here? You want to know at what point in time you will break even on the costs of the refi and start to actually save money.
People who plan to be in their home long-term tend to benefit the most from a refinance because the savings are going to pile up over time. If you’re planning to move in the next few years, you want to take a hard look at whether refinancing makes sense.
Make a Decision & Pull Together Your Information
Just like any mortgage application process, the lender is going to want to see your entire financial life on paper and they’ll ask you to provide it. The faster you get them the documents they ask for, the faster they can process the loan. If you drag your feet on this piece, it is going to delay your on your loan.
Your refinance will feel less intense than when you initially purchased your home because, well, you already own the home. All the extraneous stuff related to the home purchase isn’t happening this time around, so all you focus on is the lender and what the lender needs.
I’m Here to Help You Tackle Your Refi
Once you are in the refinance process, under no circumstances should you make any big-ticket purchases. These include cars, boats, carriages, adding a patio, buying a private jet, etc. Lenders do not want to see any significant change in your purchase history and the 100% will pull the plug if you take on more debt that changes your big financial picture. Wait until after your loan is closed and in place to get all crazy with that money you will be saving from the refi.
If you have questions, please reach out to me. I am happy to help you sort through what makes sense for you if you are looking to refinance your mortgage. Emily Campbell, from last week’s article Buying And Selling: Guest Post With Emily Campbell, Cross Country Mortgage, is also a great resource for all things lending.
Photo credit: Karolina Grabowska from Pexels
