A common question asked of mortgage loan officers by potential borrowers is, "Does it pay for me to refinance my house?" Homeowners want to make sure they are getting the lowest interest rate with the least amount of fees, and oftentimes they wonder if refinancing is worth all the time and effort involved.
In this exclusive LoveToKnow Mortgage interview, Dan Conrad, an experienced loan officer with Smith-Craine Finance, reveals when it makes sense to refinance a home and when it is best to pass on a refinance.
Should homeowners consider refinancing when interest rates drop?
Homeowners should definitely consider refinancing their homes when interest rates drop, particularly when rates fall to the levels such as we've seen recently on 30 year fixed mortgages. However, just because they should consider refinancing doesn't mean that a refinance will prove financially prudent.
If rates have only dropped a fraction of a percent (like 1/8th percent), the cost to refinance may not save the borrower much money once all fees and costs are factored in. You'll have to run the numbers with your mortgage broker to see if a refinance makes sense. This is especially true when rates have dropped .5% or more, as you may save tens of thousands of dollars over the life of the loan.
If homeowners will soon try to sell the house is there any merit in refinancing?
There probably isn't a lot to gain by refinancing if you're planning to sell the house soon because the savings you'll realize will be short lived. However, should you refinance and then shortly after realize you must sell your home due to being relocated for work, for example, the buyer may be able to "assume the existing loan" which would result in savings for both parties. In general though, if you're planning to sell there's no reason to refinance. The one exception is if you want to take cash out to have in your pocket for the next house you want to buy.
What differences are there between refinancing and rate modifications?
A refinance is a completely new loan. The existing loan becomes nil and void and is replaced by a new loan altogether. The new loan comes with new costs and fees including:
- Title
- Escrow
- Underwriting
- Processing and other closing costs
A refinance then becomes permanent, unless the homeowner refinances again in the future. A loan modification on the other hand, is a change in the terms of the existing loan, and generally only happens when a homeowner can no longer make their current mortgage payment. With a loan modification, a lender agrees to modify the loan to prevent the homeowner from defaulting on their mortgage - or worse - facing foreclosure. Modifications are generally just temporary changes in the terms of loan, which will eventually revert back to the original terms once the home owner is again able to pay their mortgage.
When is a rate modification better than a refinance?
A loan modification is only better for clients when they can't pay their current mortgage. The modification will be temporary, and unfortunately often increases the total cost of the loan over time as it's only lowered for a set time to assure that homeowners don't go into foreclosure.
What costs are incurred when refinancing?
Refinances will include all the fees and costs associated with obtaining a brand new loan. This includes:
- Points on the loan
- Appraiser's fees
- Title fees
- Escrow fees
- Underwriting costs
- Processing fees
- Charges for credit reports
When should homeowners obtain home equity loans or lines of credit instead of a full refinance?
If you have a great rate on your 1st mortgage it may be in your best interest to obtain a HELOC in lieu of refinancing the first mortgage. Moreover, if you don't need the money immediately but want it as a cushion for future renovations to the home, or as a nest egg in the event of an emergency, a HELOC may be a better bet than a refinance. However, it's important to note that since the economic crisis erupted in September of 2007, many lenders are eliminating lines of credit, or drastically reducing lines of credit, so they may not be as readily available as they once were.
When is the answer "No" to "Does it pay for me to refinance my house?"
If there is no economic benefit to a refinance (i.e., it will not lower your payment much, you won't be paying off your loan any faster, you're not getting a better rate, or not getting cash out at a reasonable rate and cost), then don't do it. There should be a tangible benefit for the homeowner in order to make the refinance worthwhile, or else it's just a waste of time.
Additional Refinancing Tips from Dan Conrad
Make sure that you're working with a respected, trusted mortgage broker. Don't be afraid to "interview" your mortgage broker. Ask them how long they've been in the business. Ask how many refinances they've done, and how much money they are able to save clients. Don't be shy. This is a big financial decision, and you need to make sure you're working with a true professional, who will work diligently to get you the best loan and terms for your situation.
