Before you start digging your old mortgage records and paperwork, there are some things you need to think about when deciding to refinance. Taking time to answer these questions could save you from making costly mistakes when you replace your old mortgage with a new one.
Question 1: What do you want to achieve in your refinance?
Refinancing is about saving money and managing your mortgage better. Rates, terms, these are some of the reasons behind a homeowner’s refinance decision. Take your pick:
- Rate: To lower one’s current rate. To reduce your existing rate of 5% to 4% shaves a slice of your monthly mortgage pie. Lock in today’s mortgage rates to be safe from future rate increases. However, don’t let that rate lock expire as you could pay a fee or lose your rate.
- Type: To switch from an adjustable-rate mortgage to a fixed-rate mortgage. In today’s rising rates climate and strengthening economy, the ARM rate is most prone to such changes. Fixed-rate mortgages are all about stable monthly payments and no exposure to rate hikes. Or, to switch from a fixed-rate mortgage to an adjustable-rate mortgage. ARM rates are lower compared to those of FRMs. When rates are falling is when ARMs are most beneficial to homeowners, e.g. decreasing rates and monthly payments. If you plan to stay less than five years, refinancing to an ARM is an option.
- Equity: To borrow equity through a cash-out refinance. You want to take on a larger loan amount to take cash out for a major purchase requiring a big upfront payment or to consolidate high-interest-rate debts. A cash-out refi could work when the value of your home has increased and your outstanding mortgage balance has been pared down.
- Payoff: To shorten your loan term. You want to pay off your loan faster by refinancing into a shorter-term loan, e.g. 30-year to 15-year. It would result in higher monthly payments at a lower rate than the 30-year’s.
- Co-borrower: To add or remove a co-borrower. A refinance is arguably the only way to remove a name from your mortgage contract. Your lender will check your credit and income and see if you can stand on your own as the sole mortgage borrower. It’s also possible to add another name if you can’t qualify for a refi on your own.
Question 2: Can you afford the costs of refinancing?
Depending on where your home is located, you’d be paying more or less in closing costs, which involve the usual fees on appraisal, origination, title services, credit report and more.
Notwithstanding how lenders price their closing costs, these fees translate to 3 to 5% of your base loan amount.
There are two routes to pay closing costs:
- You could finance it together with your loan balance but at a higher rate, also known as a no-closing-cost mortgage.
- You could produce out of your pocket, e.g. $5,000 for a $100,000 loan.
Because closing costs are not cheap, weigh them against your possible savings and future plans. Will the savings you get from refinance worth it to pay for such costs? If you plan to move out or sell the house before long, you might as well as remain on your current loan and thus skip paying closing costs anew.
Question 3: How to find the right lender for your refinance?
In refinancing, you have the option to stick to your current lender or explore another. It could be a tough call as your experience with your existing lender may have been satisfactory but you shouldn’t stop looking for better loan deals.
There are plenty of lenders to choose from for a mortgage refinance, that’s one. Each lender has its own way of processing loans, e.g. banks tend to be stricter than non-banks due to financial regulations. And yet some non-banks can only offer smaller-sized loans because they have limited capital compared to big banks.
However you go about the lender selection process, always look around and compare their offers. Don’t stop until you get the best possible loan for your refinance.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.
