Before you decide to do a home refinance, evaluate the benefits vs. the closing costs to make sure you understand the entire picture and if it is smart to move ahead. Starting by consulting with a Financial Advisor or a CPA is a good idea. They often are the ones who recommend refinancing to their clients when they can see that the benefits outweigh the costs.
- The first step is obtaining a Loan Estimate from a few lenders you are considering
The loan estimate will give you the total costs and help you compare lenders and decide if you want to proceed. Typically lenders do not charge for this.
Depending on the benefits you will gain, whether large or small, can help dictate the amount of costs worth spending. Now let’s proceed with what costs are associated with a refinance and various benefits that can be achieved.
FAQ: Don’t compare your interest rate with friends, relatives or neighbors. Nowadays rates are based on individual credit scores (FICO) and loan to value (LTV). Everybody’s situation is different.
Of course you are here because you are looking to benefit in some way from refinancing. There are many reasons for home owners to refinance and gain benefits.
Here are some of the top reasons:
- Lower the rate
How much do you need to lower the rate to make it worthwhile? This really depends on loan amount size. A $300,000 loan can benefit with even a 0.50% drop in rate whereas a $100,000 loan amount may require at least a 1.00% drop in rate. It comes down to what the total costs are and how long you plan on staying in the home.
- Shorten the term of the loan
This often provides the lowest rate when you can reduce the term to a fixed mortgage of 10, 15 or even 20 yrs. The 30 yr. loan rates are always higher. Many times your monthly mortgage payment can be similar to what you are paying now on a 30 yr. mortgage (While chopping off years of the mortgage term). Run the numbers on the rates you are being quoted to compare monthly payments.
When Should You Convert a 30-Year Mortgage to 15 Years?
- Cash-out for home improvements or debt consolidation
This is where a rate reduction may not be the priority. A comparable rate to what you currently have may suit you just fine. Or even a slightly higher rate can still make it desirable for you since you are getting the cash you need.
- Home value has appreciated
Home values have increased and it may be the right time to refinance. You will need at least 20% home equity to avoid mortgage insurance (PMI) on a new home loan refinance. Ask your realtor to assist with current home values or use online tools to get an idea. If you have mortgage insurance this may be the right time to remove this extra cost.
FAQ: Multiple benefits or a singular benefit can make it smart to refinance.
Closing Costs explained
No closing cost mortgages are available but you will most likely pay a slightly higher interest rate which you are paying over the life of the loan term. Maybe this is acceptable to you if you do not plan on staying in the home for more than 5 years.
Besides normal closing cost, you may have heard of a new mortgage refinance fee that went into effect in December of 2020. Borrowers are subject to a new 0.5 percent point adverse market fee, which was announced by Fannie Mae and Freddie Mac over last summer on loans valued at $125,000 or higher. (Fannie Mae and Freddie Mac do not originate loans. Instead, they purchase and guarantee them on the secondary market). Ask any lender you shop if this is applicable on your new loan.
- News: Fannie Mae and Freddie Mac risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty, have implemented a new Market Condition fee. The fee will be imposed on both cash-out and no cash-out refinance mortgages sold to the GSEs (Housing GSEs, include 11 Federal Home Loan Banks, the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae) and the Government National Mortgage Association (Ginnie Mae), purchase mortgages on the secondary mortgage markets from lenders). A mortgage refinance might cost borrowers more than they expect despite low rates, now that an additional fee has taken effect.
What are the closing cost fees?
- Government recording costs
- Appraisal fees
- Credit report fees
- Lender origination fees
- Discount points
- Title services
- Tax service fees
- Survey fees
- Attorney fees
- Underwriting fees
Costs can range from $2,000 to $4,000 and sometimes can be rolled into the mortgage. Remember tax escrows for property taxes and home insurance but these are cost you will pay regardless.
FAQ: Closing costs on a new refinance can vary widely from lender to lender, and from program to program. So shop around and find an honest loan officer and reputable lender. Ask for referrals from friends, relatives and recommendations on your social media accounts.
Interest rate locks
Please remember interest rate quotes are just that quotes. Rates can change at any time depending on market conditions. Ask each mortgage lender what their policy is on locking in your rate. Each lender’s mortgage processing time is important to know. And what are their policies on locks that expire during the processing period. Will they do an extension on the same rate? Or will the rate be lower or higher?
- What good is say a 45 day rate lock if the lender’s processing time is 60 days? No big deal if rates are lower but if they are higher what rate will you get?
A good loan officer will be able to estimate the time needed to process your home loan. They will know the current pipeline of loans in process currently. Once they have a complete understanding of what you are trying to accomplish and your type home property and financial situation, they should be able to tell how long it will take.
- Many overlook rate lock periods when they select a lender. Unless of course you plan on floating the interest rate during the processing of your new mortgage. In which you are taking the risk on what rate you will secure at closing.
FAQ: Rate lock policies vary widely from lender to lender. Don’t go for a teaser rate that seems lower than every other lender if the lender can’t produce that rate at your closing.
What is the "right of rescission?”
Can I change my mind after I sign the loan closing documents for my refinance? Yes, for certain types of mortgage programs, after you sign your mortgage closing documents, you may be able to change your mind.
- You have the right to cancel, also known as the “right of rescission”, A non-purchase money mortgage is a mortgage that is not used to buy the home. Refinances and home equity loans are examples of non-purchase money mortgages.
This right gives you three business days to cancel a non-purchase money mortgage agreement. In this case, business days include Saturdays, but not Sundays or legal public holidays.
The three day clock does not start until all three of the following events have happened:
- You sign the mortgage contract agreement (usually known as the Promissory Note)
- You receive your Closing Disclosure form from your lender
- You receive two copies of a notice explaining your right to rescind
If you decide you want to rescind a refinance mortgage:
- You must notify your lender in writing that you are cancelling the loan contract and exercising your right to rescind. You may use the form provided to you by your lender or provide a letter. (You can't rescind just by calling or visiting the lender).
- And within 20 calendar days after your lender receives your notice of rescission, all money or property you paid as part of the mortgage transaction must be returned to you.
In some cases, if the lender doesn’t give you a Closing Disclosure or two copies of the notice of the right to cancel, or if the lender makes certain important mistakes on your closing disclosure, you may have the right to cancel the loan for up to three years. If you think this may apply to you, you should consult a real estate lawyer right away.
FAQ: This is protection for home owners to have time to evaluate the offer before committing. It is not uncommon that the original offer has changed.
Which is the best lender for you?
The various mortgage lenders out there all have unique advantages and disadvantages. Banks, mortgage brokers, mortgage bankers, credit unions etc.. This is really crucial depending on your time frame, need for personal interaction and so on.
If you are a squeaky clean borrower a bank may do just fine. Again though what is their processing time? Brokers, mortgage bankers and credit unions tend to be more customer service oriented. But a good loan officer with a Bank can be as efficient to work with.
Each type lender has certain niches that make them easier to deal with, and also less costs overall. As in any service you choose, you want professionalism and great communication. You can tell right away in most cases how responsive your lender is in the upfront shopping stages.
If you have a more challenging situation then picking the right loan officer will go a long way. A good loan officer can evaluate quickly your situation and share what hurdles may arise.
FAQ: Just like selecting good realtor, selecting a good loan officer is equally important. Even if you have a so called vanilla financial profile and easily valued home.
Check rates from home loan lenders: Home loan lender rates