5 Things to Know About Refinancing

Considering all of the unprecedented events that took place in 2020, one of the most surprising was when the average 30-year mortgage rate dropped below 3% for the first time ever! These record-low rates sparked a refinancing boom, and although that 30-year average has inched back above 3% (at the time of this writing), refinancing is still an attractive option for many homeowners. For agents looking to give their clients something to celebrate this National Homeownership Month.  For agents (or clients) who could use a little reminder of how mortgage refinancing works, here are five things to know about the process.

1. What Is Refinancing?

To put it simply, refinancing is establishing a new loan on a property you are already paying off. Homeowners can establish this new loan by either renegotiating terms with their current lender or finding a new lender willing to offer more favorable terms. One important thing to note is refinancing takes time. It’s a multi-step process that requires submitting an application, underwriting, appraisal, and approval. Refinancing usually takes a month, on average, but that timeline could be shorter or longer based on the lender and the current market demand.

2. Why Refinance?

Although most homeowners are currently refinancing to take advantage of historically low interest rates, there are other reasons they may want to consider it. One of these reasons is to shorten the length of their loan. If a homeowner is currently locked in a 30-year mortgage, but feels they could pay their home off faster, refinancing to a 15-year could earn them a lower interest rate and allow them to avoid paying another 15 years of interest. However, it’s important to remember that a shorter loan term will likely lead to an increase in monthly payments.

Another popular reason for refinancing is to switch between adjustable and fixed-rate mortgages. If the homeowner is looking for a concrete monthly expense, fixed-rate is the way to go. If the homeowner is looking for a potentially lower interest rate and monthly payment, an adjustable-rate mortgage (ARM) might be that answer. It’s important for the homeowner to take their personal financial needs and market projections into account before making this decision.

Lastly, some homeowners refinance to tap into their home equity. According to Amerine, “A lot of people are taking advantage of their equity to take cash out for whatever their goals may be: paying off other debt, upgrading their homes, putting in pools, buying vacation homes, going on vacation, or whatever they’d like.” As a homeowner’s property value rises, so does their equity.

3. Don’t Look at Interest Rate Decreases Alone

There are many published rules of thumb to whether or not a homeowner should consider refinance – the 2% rule being one of them. The rule suggests that you should wait until you find a rate 2% lower than your current rate before refinancing. Why? Because refinancing requires charges like an application fee, appraisal fee, attorney fee, and title search that could end up costing the homeowner just as much as they will be saving.

“Instead of assuming that a 2% drop is needed, start by consulting with an expert loan officer to discuss all available options based on your specific needs,” notes Dave Eckert, executive vice president of sales for Keller Mortgage. “Depending on the reason, a very small decrease in rate can still result in significant cost savings.”

For example, on a $300,000 loan, a decrease in interest rate of only 0.75% from 3.75% to 3.0% would lower a homeowners monthly payment by $125 per month. If the homeowner paid $3,000 in refinance cost, they would recoup their cost after just 24 payments.

“Additionally, mortgage loans can be structured with no out-of-pocket costs, costs rolled into the new mortgage,” says Eckert. “An expert loan officer will guide the homeowner through all these types of details. Bottom line – homeowners should not assume that refinancing does or does not make sense based on rate decrease alone.”

4. Rates Fluctuate

As we saw last year, interest rates can change in the blink of an eye, which is why it’s important to take advantage of a favorable interest rate as soon as possible. “And, today’s market rates are more volatile than ever,” shares Eckert.

As such, it’s important for homeowners to take advantage of favorable rates as soon as they are available by reaching out to a lender and initiating the refinancing process.

Oftentimes, homeowners can’t lock in their new mortgage rate until their application has been approved, which means if the rate increases during the application process, it may no longer make sense. If homeowners are lucky enough to begin the application process while rates are dropping, they could end up with more favorable terms by the time they are approved. Regardless, working with a lender who can quickly process the homeowner’s application is a good way to mitigate these fluctuations.

5. Choosing a Lender

Lenders come in all shapes and sizes: from big banks with big advertising budgets, to boutique offerings with an exclusive client base. Most homeowners just go with whoever is offering them the lowest interest rate, but that’s not always the best option. In fact, sometimes the advertised rates are so popular the lender becomes overwhelmed with applications, causing a potentially costly delay in the refinancing process. The key is looking outside of the big-box banks for a lender that offers a great rate and world-class customer experience.

For agents with clients who have not refinanced their property in the last year, this is a wonderful opportunity to reach out and prove you have value beyond buyer and seller transactions. Homeownership is a lifelong journey, and the agents who are capable of guiding their clients through every twist and turn are the ones who will wind up on top!