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When a homeowners consider a refinance they first should clearly understand their current rate/term before doing anything else. This includes locating your previous closing statement to determine if you paid points and if you paid any closing costs. Third, the homeowner should evaluate current market options and forth make a decision on how to proceed.
First Step – Review Your Previous Closing Statement:
Why is looking at your previous closing statement important?
Because if you paid points on your current loan and let’s say you’re looking to refinance a few years later; you probably want to avoid paying points again because of the added costs you paid previously. Or let’s say you didn’t pay points last time and now you’ve been offered a really good mortgage rate but it comes with a point. Knowing clearly the amount of closing costs you paid/didn’t pay in your previous transaction might help with making a decision.
Second Step – What’s The Purpose?
The next step is to determine the purpose of your refinance: is it to obtain a lower rate? Do you want to move from a 30 to a 20 year fixed rate or 15 year fixed rate mortgage? Is it to get cash out to fix up the house? Maybe you’re moving in 3-5 years and currently have a 30 year fixed rate and want to consider moving to a 5/1 ARM to lower your rate before you move. What ever the reason may be make sure it’s clear so that you have a good understanding of your objective. Talk with your Loan Officer about your objectives when you start to get the quotes. Being open about what you’re trying to accomplish will help the Loan Officer find solutions.
Third Step – Getting Quotes:
Obtaining a mortgage quote can be fairly easy if you have the first three steps down. When you call to get these quotes try and have an idea of what loan program (30 year fixed, 15 year fixed, 5/1 ARM etc) you want and be open to other possible solutions. Try and get 2-4 quotes from reputable mortgage companies with a high rating at the Better Business Bureau. Stay away from companies that have low ratings or even no ratings. Working with a company that has a C or maybe even a B rating with the Better Business Bureau means that company might be having some problems honoring their commitment to their clients.
Request A Quote
Fourth Step – Making A Decision:
Now that you have your quotes take some time to evaluate your options before making a final decision. Do any of the quotes meet your goals? Also make sure you’re comparing apples to apples when comparing mortgage quotes. Not only ask for the “rate” but you also want to ask for “total fees; for everything including points”.
Key word is total.
The reason is that some Loan Officers avoid talking about “total fees; for everything including points” because they want hide the true cost of the loan. So that one great quote; the one that’s 0.25% below everyone else – make sure you ask what are the total fees including points to make sure you have a clear understanding of what the loan costs. And ask questions!
A reputable mortgage company; one with a high rating at the Better Business Bureau, will be happy to answer any questions you may have. If your Loan Officer is avoiding answering you directly it may be time to find a new Loan Officer.
A General Rule:
If you’re not looking for cash out or to change your term from a 30 year fixed to a 20 year fixed or a 15 year fixed then here is a “general” rule to follow: If you have the opportunity to lower your current rate by .50% or more with no points; then it’s worth a consideration. I’ve heard homeowners claim at least 1% – 1.5% drop is the minimum drop before you consider a refinance however there is almost never a chance to drop your rate that much unless you really over paid on your current loan. In some cases when you move from a 30 year fixed rate to a 15 year fixed rate or a 5/1 ARM you will see close to a 1% drop.
Let’s say you have 25 years left on a 30 year fixed mortgage and your current rate is 4.50% with a monthly payment of $1,773.40 (original loan amount of $350,000). You now have the opportunity to refinance your mortgage to a 25 year fixed rate at 4.00% with zero points (current loan amount of $319,052). Your payment drops almost $90 per month (new payment is $1,684.07), you do not extend the length of your loan and over the course of 5 years you’ll save over $5,000.00. Again you will not extend the life of the loan, your payment goes down and over 5 years you’ll save over $5,000.00.
Enough to help upgrade a bathroom; go on a really nice vacation or additional money for a child’s college fund.
Are there times where you need more or maybe less of a change?
Absolutely; the .50% reduction is only a “general” rule to follow. For example; let’s say you closed on your purchase less than 12 months ago, you have a loan amount of $375,000.00 and rates are 0.375% lower with no points and very little closing costs. You currently have a 30 year fixed and you are looking to get in to another 30 year fixed rate mortgage. Furthermore this is your “dream home” and you plan on staying in the home at least 10-20 years.
So does it make sense to refinance? I think so; you’ll save thousands in interest over he 10-20 years and to do the loan will cost you very little. Besides you probably have everything ready to send in since you just completed the purchase.