Smart Refinance Saves Homeowners Thousands of Dollars?
Many homeowners refinance their home mortgage loan to access equity or take advantage of lower interest rates.
As interest rates reach their lowest point in well over a year, it’s time to look at making smart and strategic refinance decisions that preserve your equity, reduce your costs, and consider both the short term and long term benefits.
- Should I Refinance?
- 3 Costly Refinance Mistakes
- 7 Smart Refinance Strategies
Should I Refinance?
The first question you should always ask is, should I refinance? There are a lot of people telling you that you should refinance, but that should be your decision to make.
You know rates are dropping because you start seeing ads all over TV, radio and the internet. And then the junk mail starts….official-looking notices with perforated edges announcing your rate reduction eligibility. And if you’re truly one of the lucky ones, the phone calls start coming in.
Responding to an advertisement to explore your refinance options can be a huge and costly mistake that way too many homeowners make. Making smart refinance decisions often comes down to asking the right questions.
The decision will refinance your home will not only affect you over the next 90 days, but it will also affect your long term retirement plans. Most advertisements will not present it to you that way.
There is always a cost to refinance, you will need a new title policy, attorney or escrow fee, and the bank his getting paid some way. This “some way” of getting paid usually means a higher interest rate and lender fees.
Have a specific goal when you explore your refinancing options. Remember that your home is also your retirement plan, anything you do with your investment now will impact the availability of equity in the future and how long it will take to pay it off.
Working with an experienced professional can help you do the sometimes complex analysis of your short and long term goals, and determine the best path to get you there.
3 Costly Refinance Mistakes
Mistakes can be made when you’re not making educated or informed decisions. Pushy lenders do not want you to take the time to make informed decisions. If you’re feeling pressured or rushed to refinance by an anonymous person over the phone (or in person), resist the push for urgency.
If you are feeling pressured, tap the brakes and get a second opinion. An aggressive timeline set by your loan officer is likely to be a push for a sales quota. Avoiding costly mistakes can be as easy as not allowing yourself to feel pressured, and knowing what to look out for.
Working with a professional, you will rarely hear any sense of urgency. If there is a sense of urgency, it would be the result of a comprehensive explanation and you’re making an informed decision to accelerate the timeline.
Mistake #1: Resetting the Loan Term
Reducing your interest rate is always a good idea, but most people are surprised to find out that the “savings” you’re being quoted isn’t all because of your new interest rate.
Big box refinance companies always like to lead the conversation with how much your monthly savings will be, but they’re not comparing apples to apples.
If you’ve had your current loan for any period of time, you’ve noticed that most of that payment has gone to interest. Every month, a little more goes toward paying down the loan, and a little less goes toward interest.
At the time you refinance, you no longer have a 30 year fixed mortgage. You have a 30-year mortgage, minus all of the months that you’ve paid on this loan.
When you reset the term of the loan to a 30 year fixed, it “shows you” the biggest savings by stretching the remaining balance of the loan back out over 30 years.
The new payment is based not only on a lower interest rate (presumably) but also on a new 30-year term. Paying the current balance over a longer period of time is going to make a big impact on your payment. That doesn’t make it a smart thing to do!
Mistake #2: Interest Rate Roulette
Interest rates go up and down a lot. As of the writing of this article in June 2019, mortgage rates are dropping, and are expected to continue to drop. I know it’s tempting to keep refinancing to get a better rate, but the cost to do so can easily outweigh the benefit.
Consider this, if you are resetting the term of the loan every time, that’s lost equity right there. Every time you refinance, you will incur title and escrow, or attorney’s fees. That could eat up thousands of your equity there as well.
Take the best rate you can when you can get it. You should not consider refinancing to lower the interest rate unless it can be reduced by a minimum of a half percent or unless you are reducing the term of your loan at the same rate.
Refinancing to take advantage of a “lower rate” might not make as much sense if you see how your loan balance continues to grow after every refinance. If you’re not paying out of pocket, you’re paying through rate or equity.
If interest rates drop to the point where you can no longer argue against the exploration of the idea, be sure to keep an eye on hidden costs. Rolling all costs into the interest rate is my personal preference. This increases the interest rate reduction threshold and preserves your home’s equity.
Mistake #3: Give Up The Card Number
Many of the refinance advertising machine companies hire experienced telemarketers to talk you out of your credit card number on the first call.
These fees can be disguised as appraisal fees, application fees or anything else. Those advertisements are expensive, so they are trying to make money any way they can, without considering whether it’s the right thing for you to do.
You should never have to pay upfront fees. Your lender might send you a disclosure allowing them to charge a credit card for your home appraisal fee, but that only comes after you’ve agreed to buy the home and escrow is open.
Most mistakes beyond these three could have been avoided if one of these three mistakes were not already made. Inexperienced call center based employees have little moral obligation to the outcome of your particular situation.
Companies that ask for up-front fees or a credit card number are using a sales quota based incentive system for its employees. This attitude toward reward encourages quantity or quality of conversation and decision making.
Asking for a credit card number up front is a red flag. There’s a good reason for pause. That’s all I’m saying. Just pump the brakes and get a second opinion.
7 Smart Refinance Strategies
Now that you know what mistakes to avoid, here are some really smart strategies that consider both your long and short term refinance goals.
Depending on your short and long term goals, this advice will save you time and money when looking into options that feel makes the most sense for you and your situation.
Sometimes meeting your short and long term financial goals are two separate moves. It makes sense to think this way based on what we’ve been seeing in the interest rate market.
Working with a professional, you can challenge your goals, and find the best path to meeting that milestone. You should notice a theme here.
Every refinance will cost you money in one way or another. Having a specific, well thought out goal that you want to accomplish is the best way for keeping these costs in check.
1. Pay Discount Points on Your Forever Loan
This is a popular strategy when buying a home, getting the seller to pay discount points to reduce your interest rate, and it’s also a smart strategy to consider if you’re thinking about the long game, and you know you’ll keep this loan for 10 years or longer.
Permanently buying down your interest rate could make sense if you are getting a loan that you plan to keep 10 years or more. Many high-interest retail lenders will add discount points to a quote to make the interest rate look lower.
This is a powerful strategy when you’ve covered all your bases and done your math. Don’t let someone compensate for their high-interest rates using your equity. Do the math, and make sure you’re not throwing money away for the wrong reason.
You can also use this strategy to reduce your interest paid over the life of the loan even more if you are ok with a higher payment. Buy down the lowest rate you that makes sense, and reduce the term to where your payment comfortably meets your repayment goals.
2. Refinance for Debt Consolidation
This is another way that big refinance lenders like to dazzle you with savings. While it’s a good idea to consider consolidating your credit cards into one low monthly payment, you also have to consider that you are using your retirement to do it, and you’re stretching out that debt over 30 years.
It’s true that by paying off high-interest credit card debt that your monthly obligations will get some relief. It’s also true that you can use this opportunity to fine-tune your loan term to result in both monthly savings and build your retirement equity even faster than you are now.
Consider reducing the term of the new loan so that you still improve your monthly cash flow, and shave years off your loan term at the same time.
Depending on your loan amount, this strategy could add up to thousands, and sometimes tens of thousands of dollars that you add directly to your retirement equity, instead of being paid toward interest on a 30 year fixed mortgage.
3. Refinance Exception to Pay off Student Loans
A Cash Out Refinance is always going to be more expensive than a Non-Cash Out Refinance in terms of closing costs, which translates into higher interest rates.
If your only goal is to pay off student loans for yourself, or for your child’s student loan that you co-signed for, you can use a little known exception offered by Fannie Mae.
This is a seriously huge opportunity if your current student loans are racking up interest at a rate higher than 5%.
4. Refinance and Pick Your Payment
Many companies will allow you to choose your own loan term. While most of these loans are presented as picking your payoff term, what we are really worried about is the payment.
You choose your most tolerable payment at the lowest available interest rate, and your term will pick itself. This is a smart strategy after you do the math. Every month you shave off your pay off time is one month of interest that you’re not paying.
An experienced loan officer can help you look at these options. You do not want to reduce the term if you are doing a cash-out refinance or mortgage insurance.
5. What’s the Best Loan to Refinance?
FHA, VA, and USDA are Government insured, or Guaranteed loans, and usually, have the lowest interest rates. Even after paying a Mortgage Insurance Premium with FHA, the interest rate is usually lower than conventional, and still a great short term, and tolerable longer-term strategy.
Conventional loans are often the goal of current FHA loan holders as an opportunity to remove mortgage insurance. Did you know that it’s also a great way to pay off debt or take cash out for home improvements?
It’s true, FHA including mortgage insurance is much more flexible for cash out compared to a conventional refinance. A common strategy is to use an FHA loan up to 80% loan to value, and take all the cash out that you need.
You have to wait for a minimum of 6 payments, and if Conventional interest rates are the same or lower, you can refinance the mortgage, remove mortgage insurance, and optimize your tax savings. Mortgage insurance is not currently a tax-deductible item, but please contact a tax professional to verify current tax laws.
Using FHA for cash out followed by a Conventional refinance after 6 payments is a smart strategy in a reduced rate market like we’re in today.
6. Cash Out Refinance for Home Improvement
Again, with a Cash Out Refinance, you can expect a little higher cost than if you are not taking cash out from your refinance. If your purpose is to make this your “forever home”, go to town.
As long as 6 payments have been made, you can refinance into a No Cash Out loan at a lower fixed, forever rate and term, BASED on the New Appraised Value.
This is kind of a big deal. Many experts expect that rates will continue to go down, or at the very least not go up significantly, or permanently in the near future.
If you are taking cash out for home improvements because you want to increase the value to sell the home, it’s important to know where you’re going to get the biggest bang for your buck.
The most value and highest return on investment toward a higher sales price come from an upgraded kitchen, bathrooms, and flooring – in that order.
Adding a $20,000 in-ground swimming pool is not necessarily going to add $20,000 in value. If hot tubs, pools or a pool house is your thing, that’s great! You are you.
If you’re trying to add value to your home to put on the open market, these are not good investments. Your improvement effort will not result in an increase in the sales price.
An experienced and trustworthy loan officer can help you navigate through these advanced refinance strategies.
7. Get the Lowest Refinance Rates and Fees
There is a difference in rates and fees depending on the type of lender that you use. The big box refinance mortgage companies that advertise on TV have to pay for it somehow. It’s not uncommon to find higher rates and extra fees.
An independent mortgage broker should always be the lowest interest rates, the lowest if any lender fees. I may be biased as mortgage broker myself, but I’ve always found that you’ll have a better chance of finding most experienced professionals that help homeowners for a living as a hard-working entrepreneur.
You should never pay upfront or application fees. An appraisal fee may be required once you’ve agreed to move forward with the refinance loan. Lenders that require a non-refundable deposit are charging junk fees.
As a California Mortgage Broker, I find that we have more options, lower rates, and we charge no lender fees at all. No processing fees. No underwriting fees. No lender fees at all. A broker gets paid by the lender that we choose to refinance with.
Mortgage brokers are required by law to be completely transparent, where direct lenders are not required to tell you how much they are making off of the interest rate they are charging you.
Free Home Loan Analysis
Find My Way Home is a network of mortgage professionals based in California, with Friends across the Country. We are passionate about helping you make educated and informed decisions about what your best options might be.
If you are considering any of the above refinancing options, we are here to help answer your questions, and can even introduce you to a professional that can help, if you would like.
It doesn’t cost more to use a professional loan officer, and not using one could put you at risk of not having all the facts when making a decision about the best way to reach your refinancing goals.
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