Mortgage rates have dropped to an all-time low. So, is this the time to refinance your home? Um, not so fast. We talked to home loan experts and there is no cookie-cutter formula that applies to everyone.
“Everybody’s situation is different,” said Joseph Aiken at First Trust Bank, the largest family-owned bank in Philadelphia. “If you are planning on moving in two years, you may just break even and not actually save any money by refinancing. However, if you aren’t moving and you have an adjustable-rate at 3%, refinancing for a lower fixed rate is probably a good idea.”
“On the other hand, if someone has a $500,000 home with a $200,000 mortgage at 3%, they should not bother refinancing. But if they need cash to buy a summer place at the shore, it may be a good idea,” said Aiken.
What about online mortgage apps? Someone at a call center reading off a script is not going to spend the time to walk you through the possibilities. “First Trust Bank has been in business for 85 years,” said Aiken. “We are not Quicken Loans. We are a personal lending bank and I want people to fully understand my suggestions.”
Christine McAroy at Caliber Home Loans has questions she wants you to consider before refinancing.
- When did you purchase your house?
- How long do you plan to own the property?
- Have you refinanced your mortgage after purchasing originally?
- Are you paying PMI (Private Mortgage Insurance)?
- What is the interest rate you are currently paying?
- What is your goal in refinancing?
“If the borrower is agreeable, I will ask for the current mortgage statement, determine what the estimated value of the property is,” said McAroy. “If the borrower can reduce their interest rate and the term of the mortgage or payment, it could be worth paying the cost of refinancing. I will create a closing cost worksheet for a borrower if they allow me to run a credit report. That way we can consider the advantages of the refinance,” she said.
What is a good rate?
“This is a difficult question to answer,” said McAroy. “Borrowers are usually only focused on the interest rate when they should be looking at the whole picture, by asking what am I paying for an interest rate. A well-known company, which does lots of advertising on TV and Internet, automatically adds significant charges to the closing fees. The best way to determine the cost of an interest rate is to request a Loan Estimate and or the APR.”
“Consider the customer service and responsiveness of the Loan Officer and accessibility the borrower has to their mortgage representative,” said McAroy. “I am a little biased: the “Big Box” companies forget about their customer after the application is made.”
“Most times there will be an appraisal required to determine the current value of the property,” said McAroy. “If the borrower’s goal is to eliminate PMI, the equity position should be at least 20%. Typically, we can lend 80% of the appraised value, but if a borrower has equity of more than 20%, there is no appraisal required.”
“At Caliber Home Loans, I use only local appraisers. This is important,” said McAroy. “For example, I recently closed a refinance for a borrower who applied with the Rocket company. The house was under appraised by a very significant amount, so they were unable to complete their refinance.”
Most online refinance calculators have one goal. To grab your personal data so they can follow up with annoying texts, emails, and phone calls. If you want to skip that, check out Bankrate’s Refinance Calculator which will run your numbers without requiring access to your data.
While refinancing can save you money in the long run, it comes with upfront fees that can be daunting if you’re not prepared These fees are much the same as you paid when you first bought your home. They include:
- Mortgage application fees
- Loan origination charges and points
- Appraisal fee
- Document recording and credit check
- Title search
- Escrow costs for property taxes and homeowner’s insurance
Your closing costs will vary depending on the new loan amount, your credit score and debt-to-income ratio, loan program, and interest rate. Shopping around for a lender who not only offers a competitive interest rate but also the lowest closing fees is crucial.
Remember, you aren’t just shopping for the lowest interest rate. You are shopping for a lender who understands your personal financial situation, long term goals and will be there for you when you need them.