Is Now The Right Time To Refinance?
Refinancing your home can help you achieve your financial goals. These goals may include better monthly cash flow, home improvement projects that increase the home’s value, paying off your mortgage early, or saving more money for retirement. The right time to refinance depends on five factors.
In this article, I’ll cover the five factors that will help you decide if now is the right time to refinance, the refinance timeline, and the rule you should keep in mind when you refinance.
Five factors determine the right time to refinance.
It’s important to remove emotion from the decision to refinance. Five factors determine the right time to refinance, and using these factors will help you determine if a refinance is right for you and your financial goals.
- Current mortgage rates.
- Local real estate valuations.
- How your home compares to local sales.
- Mortgage guidelines for refinancing.
- Your personal finances and your eligibility to refinance.
Current Mortgage Rates
Current mortgage rates are first on the list for a reason. If current mortgage rates are unfavorable, then now is not the right time to refinance unless you have to or are forced to. Reasons you may have to refinance include divorce, death, or emergency cash.
I use the word unfavorable rather than low because sometimes, taking a higher rate makes sense and puts you in a better place to reach your long-term financial goals. Those times include debt consolidation and home renovations that will improve the value of your home.
With your loan officer, evaluate the bond market and mortgage rates to determine if the current mortgage rate environment is favorable or unfavorable for refinancing your current mortgage.
The Bond Market And Mortgage Rates
If your loan officer doesn’t know how the bond market influences mortgage rates, I suggest finding a new loan officer. All mortgage rates are influenced by what goes on in the bond market, specifically the Mortgage Backed Securities (MBS) market.
Local Real Estate Valuations
Local real estate valuations are important in determining if now is the right time to refinance. If valuations are depressed, that will make it more challenging to refinance.
A local real estate market that is seeing stable valuations or valuations move higher than this is helpful in deciding on the right time to refinance. You can use sites like Zillow or RedFin to determine if your local market valuations are stable or improving.
A Word Of Caution
Sites like Zillow and RedFin are great, but they’re not perfect. Use them for a general idea of where the market is and know that they might be wrong, especially if you live in a neighborhood where the houses are unique from one block to the next.
Second, these sites don’t know if a house has upgrades or lacks upgrades, and this is an important part of understanding valuation.
How Your Home Compares To Local Sales
No matter what the local real estate market is doing, you’ll need to compare your home to local sales in the area before determining if now is the right time to refinance.
If your home has upgrades, compare it to homes with similar upgrades. And on the opposite end, if your home lacks upgrades, you’ll want to compare it to homes with similar features.
I understand this can be tricky, especially when there is a lack of sales to review. Just do your best and know that an exact value is not the goal but an understanding of where the market is in your neighborhood.
Mortgage Guidelines For Refinancing
A lender will have specific guidelines for refinancing a mortgage, and you must meet those guidelines if you want the underwriter to approve your loan application. Here are three basic guidelines you must meet;
- Acceptable credit score (generally 600 or higher)
- Equity in the home
- Verifiable and stable income
If you meet these basic guidelines, you are in a good position to see the guidelines for refinancing. Just know there are more guidelines you’ll need to meet, and your loan officer can let you know the details of the guidelines established for your loan program before your file is submitted to underwriting.
Your Personal Finances And Eligibility To Refinance
Your finances play an important role in deciding if now is the right time to refinance. You will only be eligible to refinance if you have a job or a stable income.
There are also other requirements to determine if you are eligible to refinance. Such as your credit history and score or if the purpose of your refinance matches the loan program. Discuss with your loan officer how your finances might impact your eligibility to refinance and if there are other requirements you need to know before you complete a loan application.
You Can Make The Determination To Refinance
I believe in homeowners using a loan officer for information and guidance. I’m also a big believer in empowering a homeowner with information so that they can determine if now is the right time to refinance. Apply the above to your situation, and, if needed, reach out to a trusted loan officer to help guide you to a point where you can decide if now is the right to refinance.
If you meet all five factors that determine if now is the right time to refinance then you’re in a good position to move forward with your refinance.
Financial impact of a refinance
If you decide to refinance you must understand the financial impact of doing a refinance. There are two main considerations;
- Your refinance term
- Your refinance cost
Your Refinance Term
When you obtained your current mortgage, you most likely obtained a loan for 15, 20, or 30 years in length (that is your term).
You’ve been paying on your mortgage for a certain time and are looking to return to the same term (or longer) as your original mortgage, which has a financial impact you should consider. When considering if now is the right time to refinance, consider going to a term closest to the current number of months you have left the mortgage you are refinancing.
This means if you originally had a 30-year term, and you’ve paid on that term for seven years, consider a 20-year term (or if your lender has it, a 25-year term). If that’s not possible, that’s ok, as you can always pay more toward your principal when you have extra money.
Your Refinance Cost
The cost of refinancing is a huge consideration when evaluating the financial impact of a refinance. There are two parts to this: evaluating the cost you paid for your current mortgage and evaluating the cost of the refinance you’re considering.
Pull out your previous closing statement (avoid going from memory) and write down that number before evaluating the cost of refinancing your current mortgage. If your existing mortgage was obtained recently and you paid a significant amount for it, you may want to consider getting a refinance with minimal costs; otherwise, the refinance might have a negative financial impact.
Refinance timeline to closing
Refinancing your mortgage is a process that generally takes twenty to forty days (depending on the lender you’re working with). The refinance timeline to closing has five steps (typically): complete the application, pre-approval, approval, conditions, and closing.
The refinance timeline to closing is a discussion you should have with your loan officer before deciding if now is the right time to refinance.
Complete The Application
The first step in the refinance timeline is completing the application. There are two parts to this. The first is filling out the loan application provided to you by your mortgage lender. The second part is providing the necessary documentation the loan officer requests.
Pro-Tip On Completing The Application
When the loan officer requests your documentation, do two things;
- Send in exactly what the loan officer is asking for
- Complete the request within 24-48 hours
Send In Exactly What The Loan Officer Is Asking For
When a loan officer submits your file to underwriting, they must ensure your documentation is complete. That means if mortgage guidelines ask for a W-2, then the W-2 must be there (not the first page of your tax returns). If you need to substitute, please contact your loan officer before sending anything in to find a solution.
All Pages, A Clear Copy, And All Information Included
When you send in your documents, all pages must be included, and they must be clear copies with all information.
If your bank statement has ten pages, send in all ten pages, even if a page lacks information. The copy of the document should be clear, and no information should be absent. Don’t black out anything, and ensure all sides and corners are clearly within the document’s margins so that all information is present for the underwriter.
Complete The Request Documentation Within 24-48 hours
Timeliness is an essential part of the refinance timeline. When your loan officer asks for documentation, please do everything you can to provide that documentation within 24-48 hours.
Getting your documents to the loan officer within 24-48 hours will help the refinance timeline and ensure your loan file is processed efficiently.
Once your loan officer has your loan application and supporting documentation, they will complete a pre-approval. This means they’ll review the file to determine if all the required information and documentation is complete and then obtain an AUS approval.
If the loan officer obtains an AUS pre-approval, then the file will move on to underwriting for approval.
What Is An AUS Approval?
AUS stands for Automated Underwriting System, and it’s a computer algorithm that reviews your information as inputted by the loan officer and determines if you meet the underwriting guidelines.
There are two AUSs most lenders use: Fannie Mae’s Desktop Underwriter and Freddie Mac’s Loan Product Advisor.
The next step in the refinance timeline for closing is the underwriter reviewing your file and issuing an approval. During this time, you’ll need to complete your appraisal inspection, and your loan officer will obtain the necessary title documentation from the closing company.
Conditions For Closing
When the underwriter issues an approval, it will include a list of conditions that must be met before loan documents are issued. These conditions may include additional documentation from you, a copy of the appraisal report (if one was needed), and title documentation.
Your loan officer will communicate with you the conditions and your closing timeline.
Closing Your Refinance
This happens when all conditions before loan documents are issued have been cleared. When that happens, the underwriter will forward the file to the closing department.
When the closing department receives the file, they will prepare the file closing by issuing loan documents following the underwriter’s instructions. Once the loan documents are ready, they are sent to the closing company for your signature.
The refinance rule you should know
If you’re not looking for cash out or changing your term from a 30-year fixed to a 20-year fixed or a 15-year fixed, here is a general rule to follow. If you can lower your current rate by .50% or more with no points, then it’s worth considering.
The idea that you need at least a 1.00% – 1.50% drop in rate before you should refinance might be a costly mistake for some homeowners who could benefit from a refinance where this doesn’t happen.
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 five years, you’ll save over $5,000.00. Again, you will not extend the life of the loan; your payment goes down, and over five years, you’ll save over $5,000.00.
That’s enough to help upgrade a small bathroom, go on vacation, or additional money for a child’s college fund.
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-rate mortgage and want to get another 30-year fixed. Furthermore, this is your “dream home,” and you plan on staying in it for at least 10-20 years.
So, does it make sense to refinance? You’ll save thousands in interest over 10-20 years, and to do the loan will cost you very little.
Deciding if now is the right time to refinance
You have the tools to decide if now is the right time to refinance. Using the above factors and maybe talking with a trusted loan officer will help you make this decision. The refinance timeline is a guide to help you have an efficient transaction. Before you move forward, ensure the market is right, and the financial impacts on your longer-term goals are positive.