October 10, 2020
5 MINUTE READ
For many homeowners, refinancing their mortgage is an attractive proposition – often realizing significant savings each month and allowing them to replace their current loan with a new mortgage bearing better terms. But for many, the process of refinancing is unfamiliar – something they may do only a few times in their lives – making the process seem overwhelming. But it doesn’t have to be.
If you’ve been sitting on the fence, you could be missing a golden opportunity – especially since mortgage rates are the lowest they’ve ever been in 2020. We’ve put together this list of little changes that can make a big difference with your mortgage refinancing to give you the confidence and education you need to take the next step.
One of the easiest ways to have a smooth and successful mortgage refinancing is to do a bit of homework and gather your personal and financial information prior to making your application. While you may not need all of the items listed below, putting this information together ahead of time can lead to a fast and easy loan process.
Mortgage refinancing fees vary from state to state and lender to lender, although there are typical fees and average costs that you will most likely pay when refinancing. Many of the costs associated with refinancing are similar to those you paid when you closed on your home initially. Take a detailed inventory of the mortgage application fees, origination fees, title search and insurance fees, appraisal fees and others that can increase the cost of refinancing.
You’ll also want to pay close attention to the points you are paying. A point is equal to 1 percent of the amount of your loan, and is often used to reduce the interest rate of your loan. Some lenders also charge points to earn money on the loan. These points can be negotiated, so be aware of what you’re being charged.
One of the often-overlooked fees associated with mortgage refinancing is the prepayment penalty, which some lenders charge if you pay off your mortgage early. It is important that you refer to your original mortgage documents to find out if you would face a prepayment penalty, and how much it would be.
Most lenders will show you unrealistic teaser rates to get your business and hide the associated costs and fees. Always request an accurate rate quote prior to selecting any mortgage refinance option. Additionally, a copy of your settlement cost papers, known as the HUD-1, should be requested in advance of your closing to give you a full outline of the costs and terms of your refinance.
Don’t be at the mercy of interest rates as they ebb and flow throughout the refinancing process – lock in your rate. Lenders often allow for interest rates and points to be locked in for a certain amount of time to cover you while your refinance is being processed. Lock in your rate when you see the rate you want or when you first apply for your mortgage refinance.
But what if rates fall? Adding a “float down” provision in the original lock can allow you to take advantage of lower rates, should they fall during the process. Because this increases the lender’s risk, a float down is often priced higher than a lock without a float down.
Be sure to get your lock-in in writing, with specific details such as the terms you’ve locked in (interest rate, points and other costs), the lock’s effective date, the lock cost, and its expiration date and time. Be sure that you choose a lock-in period that encompasses the average refinance processing time; typical lock-in periods last from 15 to 60 days.
How long will it take to break even on your mortgage refinance? There are a number of factors that go into determining this, including your current interest rate, the new potential rate, estimated closing costs, how long you plan to stay in your home and more. Quite simply, your break-even point gives you an estimate of the time it will take to recover your refinancing costs before you benefit from a lower mortgage rate.
Before deciding to refinance, calculate your breakeven point to ensure you’ll realize the benefits of your efforts. You can use our simple refinance calculator to see if mortgage refinancing makes sense for you.
The most important thing you can do to ensure a smooth and successful mortgage refinance is to come to the table prepared and educated on the process.