4 Questions To Ask Yourself Before Refinancing

While mortgage rates continue to decline, a fair number of homeowners still aren’t ready to refinance their homes. From the onset of the coronavirus outbreak, mortgage rates have been steadily dropping, which has sparked a boom for refinancing. 

According to Black Knight, the second quarter of 2020 brought the highest number of refinance loans in almost 17 years, with more than 2.3 million refinance loans and rates below 3%. At this rate, nearly 20 million homeowners have the potential to take at a minimum 0.75% off their current mortgage rates. 

When talking with Kevin Hall, he pointed out that many homeowners aren’t refinancing right now are because they may have already refinanced a few years prior and are happy with their rates. These homeowners don’t feel the need to refinance currently. 

According to Heather McRae at Chicago Financial Services, there are also countless others attempting to wait out and time the mortgage market, which is a huge mistake. Heather warns that timing out the market can be detrimental, as anything can affect interest rates. 

Instead, it’s smarter to consider refinancing when it is best for your current mortgage situation. Others are afraid of refinancing out of fear that they are about to lose their job. 

Refinancing is a big decision. We are here to help you make that decision with the following four questions to help you decide, as a homeowner, if refinancing is best for you and your current situation. 

How Long Will You Own Your Home?

One thing to always take into account, according to Jack Guttentag, author of The Mortgage Encyclopedia: The Authoritative Guide to Mortgage Programs, Practices, Prices, and Pitfalls, is how long you plan to stay in your home. If you have a short timeline, you may not even have the time to get back your closing costs.

In our current state, a good ground rule to follow is if mortgage rates decline 0.5%, you will benefit from refinancing your home. Tammi Lindley sends a word of caution, though; if you don’t plan on spending more than four years in your home, then you won’t recover your closing costs, and you may want to rethink refinancing. 

Typically refinancing closing fees cost about 3% – 6% of your loan amount. For example, say you have a $150,000 mortgage. That would cost you between $4,500 and $9,000. There is such a thing as a no-cost refinances, where your closings costs are worked into the loan as higher interest rates.

How’s Your Credit Score?

It is crucial that you check your credit score before hunting for a new loan these days because generally, to enable you to get the best possible mortgage rate, you’ll need a credit score minimum of 740.

If the pandemic has negatively impacted your credit score, you will want to take the time to work on it before deciding to apply to refinance your mortgage. You can advance your credit score by paying debt or asking for a credit line increase. 

Are You In A Hurry?

Before the pandemic, it would typically take 45 to 60 days to process a refinance. In our current economy, with most places being short-staffed and loans in high demand, it can take up to 120 days for your refinancing loan to get processed. You will really want to think about your timeline.

You will also want to take into consideration that lenders typically will prioritize housing purchases over home refinancing. Why? Buyers will usually be on a deadline. You will also want to find out from your loan officer how long their typical escrow period is. Appraisals are taking longer than they usually do.

Furthermore, give yourself adequate time to look for a loan and get up to three or four quotes. Rates will differ depending on the algorithm your lender uses. 

Do You Have Your Paperwork In Order?

You will want to make sure you are ready and prepared with your paperwork if it’s been over a decade since you bought your home. Requirements for taking such a financial risk have become a lot more strict, and you will want to make sure you’re ready, phenomenal credit score or not.

Keep in mind the extra documents you’ll want to have ready, including employment verification, since we are still in a pandemic, and a lot of people have lost their jobs. Lenders want to make sure you can take on a refinancing loan. 

 

Source
  • Bortz, Daniel. “Procrastinators, It’s Not Too Late to Refinance Your Mortgage and Save Thousands.” Money, 22 Sept. 2020, money.com/mortgage-refinance-fall-pandemic-lowest-rates/?utm_source=emailshare&utm_medium=email&utm_campaign=email-share-article&utm_content=20201108.
Ian Schindler