When you think of mortgage refinance, you think of rates like really low rates. However, refinance is about rates and more. There’s a bunch of things to consider, factors to look into should you go forward with your plan to refinance. Just like shopping for a mortgage loan to buy your first home, you certainly could do well shopping for a refinance loan this time.
Should you decide to refinance, think of shopping for loans and lenders.
The prospect of refinancing demands a decision on whether you stick with your existing lender or find a new one. If you’re happy with your current lender’s work, that’s good. But just so you’re not missing out on other lenders, speak with your current lender about refinancing deals.
If you find their response lacking or their deals falling short of what you have in mind, e.g. rate being offered is not that low, cash-out is not allowed, etc., it might be best to set your sights elsewhere. As one expert advised, two or three lenders would do as having one too may be overwhelming.
Find a lender you can trust, someone who will take the time to discuss or walk you through the details of whatever loan you are considering. This is especially relevant in the context of loan terms. Ask your lender if the loan terms would change if they sell the loan on the secondary market. Or if they have portfolio loans that may have more flexible terms.
Aside from the information you get from lenders, you can start doing your homework about refinance deals online. Make the most of online mortgage calculators to have a rough estimate of your monthly payments. It is also through online that you can reach out to lenders to make meaningful comparisons.
This leads to weighing the pros and cons of a mortgage refinance deal based on:
A. How Much It Costs?
Rates. Mortgage rates are likely to go up or down depending on market forces. They can change within an hour so it’s important to compare rates within the day and use these strategies to secure a great refinance rate.
Closing time. It takes an average of 45 days to close on a loan. Within that period, it’s necessary to keep your rate locked to prevent it from rising; otherwise, there’s no use in refinancing if you get a higher rate. Lock-in periods can be between 7 and 60 days, so it’s important to close your loan within that period.
Closing costs. Your closing costs may represent three to six percent of your loan principal. And the costs associated with refinancing include but are not limited to: application fee, loan origination fee, points, appraisal fee, inspection fee, attorney fees, homeowner’s insurance, fees unique to the loan, e.g. FHA fees or PMI, title search and title insurance, survey fee, and prepayment penalty. Closing costs can be paid upfront, rolled into the loan balance, or paid by the lender as reflected in a higher mortgage rate.
APR. This is referred to as the true cost of the loan. That is, interest rate plus closing costs. While your APR might not include all costs, but more or less it takes into account the major ones like loan origination fees, points, and application fee.
B. How Much It Will Cost?
While it’s good to focus on the costs at hand when refinancing, you should also account for the future by weighing the impact of a refinance deal on your financial plans and obligations.
Loan term. A clear distinction between a shorter loan and a longer loan lies in the monthly payment. People who refinance to a shorter-term loan are often those who want to build equity faster as payments are higher. If you have other debts to take care of, a longer-term loan is beneficial because payments are lower.
Loan option. With a broad mix of refinance loans in the market, you can choose to refinance to a conventional loan or that backed by the government like FHA, or modify your loan using the HARP® or HAMP.
It pays to make an effort to know your refinance loans and lenders better. That way, you can make an informed decision and be guided accordingly.
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.