8 Things to Consider When Refinancing
Since the 1980s, rates in the US have consistently fallen on mortgage loans, with new all time lows regularly being established. Refinancing can be a great financial decision, but it’s important to consider a few things before diving in so you can be prepared for the process, outcomes, and ultimately end up with a loan that offers you the most benefit possible.
1. Act Quickly
If a refinance will benefit you financially, it’s important to act quickly. The market moves every day, and rates change daily (sometimes multiple times during a day) so if a refinance benefits you, it’s important to act quickly on an application and locking in. If you’re saving $500/month, it’s better to lock in that savings than trying to find another lender that can save you an additional $20/month while risking the market potentially getting worse.
2. Understand a LOT Goes Into Your Rate
Mortgage rates vary a lot based on many factors, so don’t trust the ad, and understand that if things change on your application, the rate/product offering can vary, too. For example, on many loans rates will be different (sometimes much different) based on just a 20 point difference in FICO score. Different loan products (FHA vs Conventional, for example) have different rates, too. Property type (Condo, Single Family, Manufactured/mobile) will often result in different rates, too. Some other factors are loan amount, area, and the amount of equity you have in your property. A good loan officer will ask the right questions up front to make sure your rate quote is accurate, but understand there are a lot of things that influence rates beyond what you see in the ads!
3. You Can’t Catch the Bottom (Without Some Luck)
When rates fall, there are many factors that influence the rates a lender can offer. One of those factors is capacity, or the number of loan applications a lender can handle and process at one time. When rates fall and application volume increases, it can lead to longer rate lock periods, which cost more. Additional staffing needs and system strains can also cause the margin lenders need to maintain on loans to increase to cover additional overhead, resulting in artificially higher rates. The borrowers who catch the absolute lowest rate tend to be lucky and beat the crowd when applying. After all, we don’t ever know when rates were the lowest until they’ve already moved up.
4. Consider Your Benefits
There is really no magic rule when it comes to refinancing. Some loans, like a VA IRRRL, require very specific changes to an existing loan, and all refinances should have a tangible benefit to a borrower – but for some people, $100/month savings is huge. For others, taking cash out or reducing a loan term are where they find value. Each situation is unique, but what’s consistent is that every refinance loan should be worth the cost. Consider closing costs, and determine if the benefits of the refinance make sense for you. One general rule is that a refinance is worthwhile if the monthly savings quickly offset your closing costs.
5. Life Doesn’t Happen in 30 Year Increments
Just because you’re considering a 30 year mortgage, it doesn’t necessarily mean you should think about “all that interest you’ll save over 30 years”. Odds are, you won’t have your loan even close to that long! In 2018, the median duration of homeownership in the US was 13 years (according to NAR), and on top of that, many people have multiple loans while in a home. The life cycle for many home buyers and homeowners often includes rate/term refinances to reduce monthly payments, cash out loans to use home equity, or term reduction loans to shave interest off the mortgage, so it’s not uncommon for people to have a new mortgage every few years as markets change and life events occur. For these reasons, looking at “savings over 30 years” is going to offer a poor vantage point for most people, and an unrealistic picture. Instead, focus on shorter term (3-5 years) benefits, BUT:
6. Focus on Long Term Security
Always play it safe when it comes to a mortgage. In most cases, it’s not just finances, it’s your home, so be smart when it comes to analyzing savings, rate, etc. For example, if you’re in your forever home and don’t have much equity, a short term ARM loan may not be the greatest product for you. If you can see yourself in your home for 3-5 years, a 7-year or 10-year ARM may make sense. If you’re unsure but could potentially be in your home longer, a fixed rate loan may be a better option for you even if the payment and rate are higher than other products available.
7. Work With a Savvy Advisor
Any lender can quote rates, drop ads in your mailbox, or advertise online. You’ll end up in the best position if you work with someone you can trust. Get referrals, and make sure your loan advisor can walk you through cost-benefit analysis, talk you through various options, and asks you questions to help determine which product is right for you. The lowest rate isn’t always the best option, and when restructuring what is often the largest and most complicated debt you’ll have, it makes sense to get it right every time. Closing costs for a mortgage are often in the thousands of dollars (for all loans – those ‘no closing cost loans’ have costs too, they’re just built into the rate), so it can be extremely costly to get the wrong loan.
8. Find a Company with a Good Track Record
If you don’t have a loan officer you love and haven’t gotten a strong referral, work with a reputable lender that has a lot of great online reviews. See what other customers are saying, check how long the company has been around (avoid “pop up” refi companies that pop up during periods of falling rates), and make sure they have a good track record. If a company has only a handful of reviews or is difficult to find online, you’re likely rolling the dice.
Want to see how a refinance could benefit you, or what options you have? Check out our refinance advisor and one of our experts can get you information on what could work best for you!