You may be thinking it is too late for you to refinance your mortgage. Rates are getting higher, right? Indeed they are. But do you know the benefits of refinancing in general?
One fallacy I run into with potential borrowers is in direct correlation of how much money it will cost to close this new loan versus how much money it will save them later. If we get past this initial fallacy, these people will see that refinancing makes the best financial sense as long as you can recoup the costs in the timetable the rest of this article will focus on below.
I am going to reference an article from msn.com throughout this article that describes five tips for refinancing a mortgage. I believe some of the ideas of this article are true, however, they are not as relevant today. Let me break it down for you:
Tip Number 1 - Shop Around:
Indeed you should. I have no argument against it. However, when you are shopping around for a mortgage rate, here are a few things you should know:
1. Mortgage brokers will offer you a wide range of lenders to choose from.
Brokers have multiple lending partners for a reason - you. If you choose to obtain your mortgage through a broker, the benefits outweigh the risks. For starters, brokers exist to shop around your mortgage for you. Responsible loan officers take into account the needs of their clients before their own needs. Why else was the CFPB created? Why else would there be a Nationwide Mortage Licensing System? Both entites exist to protect the consumer, so each new rule laid out by the CFPB is enforced through the rigorous process of obtaining a mortgage loan originator license through the NMLS. The NMLS ID number next to an MLO's name is a badge that says "I have passed the rigorous testing so I can knowledgeably coach you through the loan process." It serves as a reminder to the consumer that a licensed loan originator knows what he/she is talking about, and can be trusted.
So why shop around? Let your mortgage broker worry about the best program for you and your family. After all, that is why the broker exists! (So, I guess you want point number 2, huh - see below):
2. Mortgage Loan Originators that work for a Mortgage Broker are required to be licensed - Bank Employees have NMLS ID numbers, but not all are licensed originators
Tip Number 2: Figure your break-even point:
Have you ever wondered if a refinance was really in the cards for you, but you just were not sure? There is a way to figure this out - it is called the "40-Month Rule."
If you do not make back what you have spent on your intial transaction in a 40 month time frame, a refiance is not in the cards for you. Where this rule came from is unknown to me, however, it is used by one of our top lenders in determining the feasibility of the refinance. Now, I'm not saying "do not pay attention at all" to the tip in the referenced article we are going through here. But what I am saying is that you should calculate your monthly savings with the new interest rate - a good way is to use our mortgage calculator - and then figure out how much time it will take you to recouperate those costs. Here is an example:
Borrower A has incurred on her refinance a total of $2235 in closing costs
She is currently paying $565.52 in Principle and Interest on her home
With our new loan, Borrower A will pay $390.67
The way the equation works is as follows:
The difference of $565.52 and $390.67 is $174.85
Now we divide $2235 and $174.85 to come up with the number of months it will take to recouperate Borrower A's closing costs
We come up with 12.78 months
Of course, all of this is based on taxes and insurance staying the same as before. So, if you are thinking that maybe now is not the time, play around with the mortgage calculator and determine if today's rates are sufficient enough to pull the trigger on the transaction. You will be surprised at what you find out. (By the way, the above figures are actual figures taken from a transaction I completed this time last year. This stuff really works).
Tip Number 3: 'No-closing-cost' deals really have closing costs:
This is 100% true. There is no such thing as a 'no-closing-cost' loan. Our good friend Erin Lantz is actually quoting the Economist Milton Friedman when she says ..."there [really] is no such thing as a free lunch." Friedman established this in his book of the same title. What he means by this is simple - nobody works for "free." You just do not see that anywhere, or else the economy would tank in a heartbeat.
Indiana does not have lawyer fees because we are not in a state that requires attorneys present at closing. That is a HUGE relief. Indiana only requires a licensed Notary Public. Fees can be covered by Lenders and Sellers, if not the Borrower. It is vitally important to discuss seller-paid fees when purchasing a home, and lender-paid fees can be a great selling point on refinances if you can afford the higher interest rate as a result.
Tip Number 4: Consider a 'cash-in' refinancing:
This tip is absolutely untrue. Nobody in this economy has the money to both refinance their home AND pay down their principle - or else they would just pay down their principle!
Where this tip is a fallacy lies inside the following two points for people that may be underwater, or close to it:
1. You have to have a minimum of 5% equity in your home to refinace
Fannie Mae and Freddie Mac purchase mortgages on the secondary markets. These are government entities that protect mortgage securities and either make money by holding them or lose money. Both agree on one thing - you do not have to have 20% equity in your home in order to refinance. Certain property types require certain guidelines, but on a primary residence, this simply is not the case.
2. Programs exist for underwater borrowers
An underwater borrower has more debt on the home they live in than what it is worth. Let's get that out of the way first. If you owe more than what your home is worth, there are two government-sanctioned refinance programs available to you so you can take advantage of lower interest rates. Foreclosures happen. There is no way around them for good. These two programs exist to help established homeowners avoid it. They are as follows:
Home Affordability Mortgage Program (HAMP) aka: Home Affordability Refinance Program (HARP)
Government versions: FHA Streamline & VA Interest Rate Reduction Refinance Loan
Both programs offer ways of reducing your interest rate on your first mortgage while allowing you to keep your second mortgage. Both combined mortgages equal more money than what the home is actually worth on the market. These programs are great if you think you cannot get out of your current first mortgage because you cannot afford it anymore. Feel free to give me a call on either.
Tip Number 5: Get a rate-lock confirmation:
Why this is even a "tip" is beyond me. A responsible mortgage loan originator will always keep you informed of the happenings on your loan. When your loan rate is locked, the lender has you sign another set of forms which indicate on them that your rate is locked! If you, as the consumer, are not paying attention to what you sign, then that is your fault. The MLO should explain to you that your rate is locked, so this is why you are signing these forms! Oh, and if you request a 60-day lock period, be prepared to pay for it. Most loans - especially refinances - can be closed much quicker with borrower participation throughout the process. Sixty days is a long time to wait if you do not have to.
I hope you have at least learned a thing or two about how the refinance process works. When you read content posted online from various news sources, be sure to check out other resources first before making any decisions. Winterwood Mortgage exists to help consumers make informed decisions on their next mortgage. Some of the aforementioned tips were really faux pas that are widely believed by the general public. I believe there should be transparency between your mortgage lender and yourself, don't you? That is why I commend you for reading this article, and I encourage you to ask questions and seek the advice you need to be successful in your next mortgage transaction.