One of my relatives recently refinanced his home loan. Yes, it is a newer purchase and normally it makes no sense to re-fi so soon. But what is normal about 2020? Especially in the real estate world of mortgage rates. We are experiencing outlier numbers so low, reporters keep using terms like “historic, all-time, unheard-of,” to describe it. So, what “normally makes no sense” makes total sense! After all, who doesn’t want to…
- Decrease their interest rate?
- Lower their monthly payments?
- Pay off their loan faster?
- Perhaps tap into their loan equity?
- Or turn an adjustable-rate into a fixed-rate loan?
Now, before clicking on the website of We Throw Money at You Mortgage Company, make sure to ask lots of questions so you can be confident with the outcome. After all, paying $12,397.14 in refinancing fees to save $37 a month for a 15-year loan is not something to brag about.
What questions should you consider? At least five.
Q1: What Exactly Does My Quote Include?
Most lenders will provide a detailed breakdown of all closing costs. READ IT. A homeowner currently paying $2262 a month will swoon by reading a new projection of $1173. Until they realize the quote only includes the M of PMI (property taxes, mortgage payment, insurance).
Furthermore, the loan estimate must be detailed – loan amount, the rate, appraisal fee, credit report charge, title insurance, and all closing costs resulting in a clear, concise total picture. Now ask the question, “Is it worth it?” For instance, is it worth paying $7,253 to gain a monthly savings of $139? Sure, you will make up the difference in a little over four years but will you still own your home forty-eight months from now?
Q2: What Amount Must I Bring to Closing?
“What? What do you mean I have to pay money to refinance?” As we say in Texas, “Yep, you do.”
Usually, homeowners should plan on paying 2% to 3% of the amount borrowed. What does that mean? Say you want to refinance your home to the tune of $300K. At 2%, your cost will be $6,000. At 3%, your cost will be $9,000. This amount will be due at or before closing.
May I state the obvious? SHOP AROUND WHEN YOU REFINANCE, THIS IS A LOT OF MONEY! Whew, I feel better now.
“Are there options,” you ask? Yes, there are. You may be able to bring 0 dollars to closing (yes, that is a Zero). How? Two ways.
First, because you took my advice and shopped around, you found a lender who will not charge any points – at all! Yes, there are other fees so keep reading.
Second, if you pay points to obtain a lower rate, ask the lender if you can fold the 2% or 3% into the loan – in essence making interest payments on the $300K you are borrowing plus on the 6K to 9K you are paying to obtain the new loan. Furthermore, since we are thinking about ZERO costs at closing, go ahead and ask the lender if you can enfold ALL the fees into the loan when you close.
Q3: Are there any Surprises when Refinancing?
Sometimes. Always ask the loan officer, “Hey, are there any other fees not included in the written estimate you gave me?” For instance, any insurance costs or property survey fees or…?”
If there are any, again, ask the lender if you have the option of adding the total amount into your loan package. And does it make sense to do so?
Q4: Are You Wanting to Cash Out any of Your Home Equity?
Here is the general rule of thumb: lenders usually want to see homeowners have some “skin in the game.” (Yeah, where did that colloquialism come from?) How much skin? At least 20%. And you, the borrower, want to stay above 20% so you don’t have to pay PMI (Private Mortgage Insurance – for more information on PMI – here is a helpful link ).
Let’s stick with the $300K loan. To pull out any equity, you would want your home to exceed an appraised value of $360K. But again, and this is CRITICALLY important – discuss the ramifications with your loan officer and your CPA.
Q5: How Long Should You Set the Term of Your Loan?
With interest rates at all-time lows, borrowers have many more options available to them. For instance, higher interest rates provide inherent incentives to pay off the loan asap. Conversely, for some homeowners, carrying some mortgage debt may offer certain tax benefits. Understanding these factors will go far in the decision- making process of securing anywhere from a 10-year to a 30-year mortgage. Be sure to consult your CPA or other tax consultants prior to making your loan commitment.
How did it work out for my relative? Exceedingly well. He invested a little more than $5,000 to save $400 a month. His 5K investment will pay off after one year. I asked him if he had any advice to pass on. “Just one thing,” he replied. “It took longer than I imagined.”
If you would like additional help, please email me firstname.lastname@example.org. I work with some outstanding lenders who will not pressure you and will be clear and upfront. They are like me, here to serve you well.