Case in point, right now the fear of a global coronavirus outbreak has the markets in a tither and that anxiety has resulted in lower and fluctuating interest rates. How long will the virus continue to influence the markets? Right now, that is unclear.
As typical, the lower interest rates have many asking questions and inquiring about refinancing …
- Can I Refinance?
- Is it smart to Refinance?
- What can I accomplish by Refinancing?
Years ago, the theory was … if you could save 1 percentage (1%) point off your mortgage rate … it was smart to Refinance your loan.
That thinking then gave way to a new measurement. The goal of saving one-half to three-quarters (1/2% to 3/4%) off the current mortgage rate held then became the new norm.
Because of those old but well-known “rules of thumb”, many of my current clients now ask me, “What defined percentage or dollar amount of savings should be my signal that it’s my time to Refinance?”
Unfortunately, an answer is not that quickly available or easy to provide …
The wisdom or “correctness” of their refinancing (or not) actually hinges on far more than interest rates alone. There is no universal, quick or simple broad answer to provide.
Instead, the answer they seek is truly specific to their individual and unique needs and goals. And in order to provide them that answer, I must ask questions and gain facts first.
For anyone considering refinancing, their journey of discovery must start with a thorough understanding of the details of their current mortgage and current mortgage statement. Many decision-making tools and needed information are found there.
Here’s just a small sample of the facts/info that must be shared between homeowner/borrower and lender when considering a Refinance:
- Current Mortgage Interest Rate
- Current Loan Balance
- Current Mortgage Escrow(s) Balance
- Current equity held in the home
- Does the current payment include PMI (Private Mortgage Insurance)?
- Remaining term of mortgage payment (Or the Original Loan Term)
- Current Credit Scores
- Current outstanding Debt (Debt to Income Ratios)
- More …
Other details must be discussed as well in order to come to a solid and wise monetary decision. Additional discussion will include the following:
What needs must the Refinance meet?
A. Payoff of other debt(s) such as higher rate credit cards, Student Loans, or Home Equity Lines of Credit
B. Is a reduction in payment term desired? (Example: Reducing a 30-year loan to a 20-year of 15-year term)
C. Getting rid of PMI (Private Mortgage Insurance)
D. Cash-Out: For payment of home improvements or home repairs
E. Lowering of Interest Rate (Lowering of monthly mortgage payments)
F. Change of Mortgage Program (Example: ARM to a Fixed-Rate loan)
Borrower and Lender must consider much more together too. Such as:
- How long will it take to recoup the cost of the Refinance?
- Expectations to stay in the current home? (This speaks directly to calculating the “break-even” point for refinancing).
- Add closing costs to the Loan balance or pay from personal savings to save even more interest over time?
- More …
Borrowers considering this action must remember that closing costs will be involved should they pursue a Refinance Loan. Those costs must figure into their decision-making process.
As with an original mortgage, those costs, and the interest rate secured, rest upon many factors, including credit scores, debt held, and more. Generally, Refinance Closing Costs will include:
- Appraisal Fee
- Loan Origination Fee
- Title Insurance
- Homeowners Insurance
- Taxes
- More … (Costs specific to the individual Borrower)
There are different methods that can be utilized for paying the Closing Costs incurred with a Refinance. Payment can be made at the time of Closing. It’s also possible that the costs of Refinancing can be “rolled into” the new loan itself.
Again, a thorough discussion of the pros and cons of each method … as well as the possibility and availability of doing so … must be held between borrower and lender. A clear and wise choice can only be revealed after such a conversation is held.
Of special note: Because the success (and monies) realized from a Refinance rest so heavily upon interest rates, response time and timing need to be of the utmost concern. Clients must remain available and respond quickly to all communications and requests from their lender.
And both client and lender must be ready to react to fluid market indicators. Response time and timing of actions taken can make a huge difference as to the interest rate secured and ultimate success found.
As with all mortgage financing, those hoping to Refinance benefit from starting their mortgage process early. Acting proactively as to checking their credit, their credit report, collection of needed documentation … and reaching out to their lender.
So for anyone wondering … can I Refinance? Is it smart to Refinance? Start now. Don’t hesitate. Don’t wait.
The sooner you start and the sooner you ask your questions, the sooner you will have the answers you need to move forward confidently …
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