No matter how far COVID-19 affects the world’s economy, fortunately, or unfortunately, there is some good news too, at least for the time being, or hopefully for long, or maybe till the virus is contained.
The fear of pandemic has erupted throughout the world, causing uncertainties and anxieties in the market. As a result, the world has witnessed historically low-interest rates.
Believe it or not, the unexpected drop in the interest rates must have grabbed the attention of mortgage loans out there, who must be looking forward to refinancing their borrowed loans.
They are right in their observations, but what if the interest rate goes further down or any other drastic change could occur shortly?
That’s why we always suggest loanees and loan-seekers play safe and be futuristic in their decision-making.
If you are also confused between refinancing or not, you are at the right place; we will help you settle all your ifs and buts and doubts that are clouding your refinancing decision.
Those who don’t know, refinancing is simply a replacement of the existing mortgage with a new one. Generally, people refinance their loans to lower their interest rate, reduce their monthly installments, or change their loan terms and/or programs – often from an adjustable-rate to a fixed-rate. (more details below)
There is a theory that if you could save 1% off the current mortgage rate, then it is good to refinance your mortgage plan. Later on, this 1% reduced to 1/2% to 3/4% off the mortgage rate.
Now, when mortgage rates are very low. You might ask the defined percentage or dollar amount of savings that are perfect for Refinance.
Sadly, the answer cannot be in black and white – it’s not something to be answered YES or NO…
You may ask why?
Because the decision of refinancing cannot only be affected by interest rates, there are other factors that are also important for consideration. The most important factor is your goals behind refinancing.
And for that matter, you have to ponder upon your current mortgage – not just necessary information. It’s way more than that; let’s help you figure this out!
If you are considering refinancing your home…
Before refinancing the mortgage, make sure you know everything about your current mortgage and the respective statement.
To make your life easier in this time of crisis, we have drafted a list of the facts/info that should be shared between you (homeowner/borrower) and the lender for Refinancing.
- Mortgage Interest Rate
- Equity held in the home
- Loan Balance
- Mortgage Escrow(s) Balance
- Credit Scores
- Outstanding Debt (Debt to Income Ratios)
- Payment – with and without PMI (Private Mortgage Insurance)?
- The remaining (Or the original) loan term of mortgage payment
- And more …
We are not done here; there are other details too that must be discussed to come with a financially sound decision. Some other essential discussions include:
Let’s begin with some basics!
- What is the very purpose behind refinancing?
- Is it the other debt(s) like Student Loans, higher rate credit cards, or Home Equity Lines of Credit, that you want to pay off?
- Do you want to reduce payment terms? Like, want to reduce a 30-year loan to a 20-year term?
- Are you done with PMI (Private Mortgage Insurance)?
- Is there a cash-out problem?
- Do you want to lower the Interest Rate?
- Or, you want to change your Mortgage Program – ARM to a Fixed-Rate loan. (more details below)
This will decide the future of your mortgage loan.
Once the self-understanding is done, now it’s to discuss things that borrowers and lenders need to talk about, to make refinancing easier, with each other. Such as:
- The duration to recoup the cost of the Refinance.
- Whether to add closing costs to the Loan balance or pay using the personal savings – to save more interest over time.
- Expectations with the current mortgage – this helps in calculating the “break-even” point for refinancing.
- And more …
Here again, with the original mortgage, both closing costs and the interest rate secured are rested on many factors, such as debt held, credit scores, and more.
Don’t know what makes up Closing Costs?
Add all of these costs – all these vary from borrower to borrower;
- Loan Origination Fee
- Appraisal Fee
- Homeowners Insurance
- Title Insurance
- And more
Borrowers considering refinancing must remember that closing costs will be included in their decision-making process.
As far as payment of Closing Costs for refinancing is concerned, there are two options -whether pay at the time of Closing or “rolled into” the new loan.
Now, who will decide which option to go with?
It’s the mutual decision that is held between borrowers and lenders after a thorough analysis of the pros and cons of each method, along with the availability and possibility of either option.
Since the success and finances of a Refinance heavily depend on interest rates, so, don’t forget to document the response time and the timing of the actual process. As clients should be available throughout the process to respond to all communications and commands/requests of lenders.
How response time and timing of actions make a huge difference?
Because the overall success resides in securing the interest rate, which fluctuates timely. And both, client and lender, must be ready to respond timely to (if any) fluid market conditions.
This is how refinancing a mortgage takes place, now let’s discuss some of its benefits and risks attached, followed by mistakes that should be avoided.
Potential Gains of Refinancing
Some of the benefits for refinancing into a low mortgage rate are:
- You can lower monthly installments – As per the study, an average homeowner saves around $160 or more a month with a refinance – a lower monthly payment means more savings – that you can use to pay off your other debts or save to get away with your loan sooner.
- Reduce the term of the loan – If your mortgage is in the early stages of your career, then having a 30-year mortgage makes the most financial sense. But if you want to pay off your mortgage sooner, then reducing the loan term is the right decision.
- Remove the PMI – To reduce your total monthly payment, keep a check on your property appreciation, especially if the principal paid off will not be required to pay the insurance. With enough appreciation, refinancing is a sensible decision.
- Switch from/to between a fixed-rate and adjustable-rate mortgage – With an adjustable-rate, your payment can be adjusted (up or down) as per the changes in the interest rates. Refinancing is often helped loanees to switch to a fixed-rate loan, which offers reliable and stable monthly payments – it’s a kind of security that ensures fixed loan payments.
Special recommendation: In the current situation, having an adjustable-rate is good, but again, it’s still uncertain.
- Consolidate the first mortgage with (if) your home equity line of credit (HELOC) – To simplify your finances, roll both of them into a single monthly payment, you will only be needing to pay only one debt. HELOCs often have adjustable rates, fixing the rate may help you save more money in the long run.
Risks of Loan Refinancing
Depending on your financial standing and goals, refinancing may not be in your favor. Refinancing offers many benefits, but we cannot ignore the risks attached.
Why am I saying this?
Because refinancing means restarting the amortization process, from scratch, right?
So, if your 30-year loan is 5 years old and you decide to take out a new 30-year mortgage, then the duration of your mortgage will be 35 years – maybe it’s good for you, but if you’re already, say, 15 or 20 years into your mortgage then refinancing into a longer-term loan would not be a good option.
Generally, refinancing is a good option for the conditions like we all are facing right now, the mortgage rates are falling near record lows due to the COVID-19 pandemic, and that’s the reason why mortgage refinance applications are surging.
Mistakes to avoid when refinancing into a low mortgage rate
Mortgage rates are all-time low, and homeowners are rushing to refinance so that they can shave down their monthly payments – maybe for some, that makes hundreds of dollars.
But, be careful! Because with mortgages, it is easy to make a misstep, and errors can be costly.
Here are some of the most common ones that you should avoid on your way to a new loan/s.
Would you buy a new car, or even a plane ticket, without looking around and comparing prices?
You probably wouldn’t, but sadly, loan borrowers do that often, they grab the first mortgage they see. Studies from the U.S. Consumer Financial Protection Bureau have found that 30% of mortgage borrowers never comparison-shop.
Research by LendingTree found that those who refinance without compassion end up paying an average of $163 extra a month or $1,953 a year.
So, compare mortgages, at least three or more lenders.
Taking too long to make a final call
Don’t waste your refinance opportunity – Financial markets are volatile, so are mortgage rates, and what’s available today may not be guaranteed to be available tomorrow.
So stop dawdling – move quickly and lock a rate if you find a suitable one that can work well for you.
If you obsess about trying to time things and wait for the right mortgage rate, you’ll miss out on the best deal available.
The rule of thumb is – if the numbers make sense, grab the opportunity – the cost of waiting often backfires shortly.
Looking for a zero-interest mortgage
A zero percent mortgage?
Let me burst this bubble – the world would never be that favorable!
Have you seen the headlines recently that the Federal Reserve cuts interest rates close to zero?
Yeah, that happened — but it doesn’t mean that a 0% mortgage is available, it’s not even possible.
Today, rates are at some of the lowest levels and are very attractive, so don’t waste any more time hunting for an interest-free loan.
Not having the proper paperwork
Have your paperwork organized that you have to represent to the lender; if your “docs” are not in a row, you will lose on a refinance opportunity.
Having all documentation about assets, income, and taxes makes the refinancing process much smoother.
And yes, make sure you get your taxes done on time, if not sooner. Why?
Because your tax returns determine how much you can afford to spend on your mortgage per month. It ensures that your loan is affordable for you, not just for now but also for the future.
Ideally, lenders expect to see one to two years’ worth of personal tax returns.
Forgetting mortgage closing costs
Since Refinances aren’t free, it includes all those closing costs (application fee, origination fee, appraisal fee, a settlement fee, and some others) that you had paid when you got your original mortgage.
These mortgage closing costs are typically about 2% to 5% of your total loan amount, or according to the latest estimate from the real estate data, an average amount of $5,749.
Don’t want to or can’t pay your closing costs upfront?
Then you’ll be offered a slightly higher mortgage rate.
Another great option is to ‘roll-in’ your closing costs – it means add all the costs to your mortgage balance – both choices can reduce your closing costs and/or maybe, it makes a ‘no-cost’ refinance possible too.
Don’t get upset if your mortgage seems too long.
You must indeed be looking to get away with your mortgage refinancing at today’s rock-bottom rates — but then, be prepared to relax and chill. The coronavirus pandemic has slowed down everything, including mortgage processing.
As lenders are handling substantial volume levels, so patience is necessary, and yes, businesses are also asked to strictly adhered to safety measures. Resultantly, borrowers are facing delays in mortgage closings and approvals, and title searches are also taking extra time.
Add to that, many town halls and county clerk’s offices are also closed or not available online, due to which lenders finding trouble in closing the deals. And to compensate for the backlog, most of them are working longer rate lock periods at the same price as they do in shorter lock periods.
So for anyone curious … Can I Refinance? Is it the right time to refinance? Is it smart to Refinance?
Don’t wait… start now!