Before a homeowner answers, “is now the right time to refinance?” they first should clearly understand their current mortgage.
This means knowing exactly what your current interest rate is, the number of years your loan is based on, if you paid points, and if you paid any closing costs. A homeowner needs to then define the purpose of the refinance so he/she can clearly see if there is a benefit to refinancing.
The homeowner should then evaluate current market options and make a decision on how to proceed.
Here Are The Steps To Refinancing
If you are trying to determine if now is the right time to refinance, then you’re in the right place. Our easy-to-read step-by-step guide will help you make that decision. Each step covers an important part of the process, so make sure you follow it closely.
1. Review Your Previous Closing Statement
Find your previous closing statement and review it.
Why is this important? Because if you paid points on your current loan and 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 number of closing costs you paid/didn’t pay in your previous transaction might help with making a decision.
2. 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.
Whatever the reason, 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.
3. Getting Quotes
Obtaining a mortgage quote can be fairly easy if you have the first three steps down.
When you call to get 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 two to three 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 the company might be having some problems honoring its commitment to its clients.
4. 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 also ask for “total fees; for everything including points”. The key word is “total”. The reason is that some Loan Officers avoid talking about “total fees; for everything, including points” because they want to hide the true cost of the loan.
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 To Follow
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 consideration.
I’ve heard homeowners claim at least a 1.0% – 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 overpaid on your current loan (or the market is coming out of an exceptionally high period for interest rates). 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 1.0% drop.
An Example
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.
Additional Consideration
Are there times when 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 into another 30-year fixed-rate mortgage. Furthermore, this is your “dream home,” and you plan on staying in the home for at least 10-20 years.
So does it make sense to refinance? I think so; you’ll save thousands in interest over 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.
