Pros weigh in on refinancing mortgage
Historically low rates can make it a smart move
Everywhere you turn today, there’s talk about refinancing. Thanks to the Federal Reserve slashing interest rates to zero in mid-march to fend off the financial devastation of the coronavirus, extraordinarily low interest rates are available to borrowers.
Refinancing, though, can cost you as well as save you dollars.
The cut was the most dramatic attempt to bolster the economy since the 2008 financial crisis. It left borrowers hoping they could lock in the lowest rates and save big if they refinanced.
Lenders agree that the results of refinancing vary on a case-by-case basis, but there could be huge savings if you refinance for the right reasons and understand what you’re getting into. Here’s what it means to refinance, why it could be right for you and a breakdown on the refinancing process.
What is refinancing, and why should you do it?
Put simply, refinancing a mortgage involves paying off a current home loan and replacing it with a new one. If done correctly, refinancing has the potential to save borrowers a large percentage of what they would have paid on their previous loan.
There are many reasons why someone would choose to refinance, including to get a lower interest rate, to shorten the term of their mortgage, to switch from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage or vice versa, or to tap into home equity, to build an emergency fund, finance a large purchase or consolidate debt.
David Reynolds, president and CEO of Home Federal Bank, told Knox News that no matter why you’re looking to refinance, now is an ideal time.
“Particularly right now, we are seeing very, very low rates,” Reynolds said. “Depending on the week, it could be a historically great time to refinance.”
Who should refinance?
Low interest rates typically benefit borrowers, but you’ll want to examine your circumstance, do your research and talk to professionals before making a move.
Reynolds tells his clients that the first thing to consider is the difference in rates between their current loan and the loan they’re considering. He says if the rate his clients have now is at least half a point higher than the day’s rates, that’s a good sign that refinancing can be worthwhile, depending on the lender’s fees.
The second question borrowers should ask is whether they want to stay in their home for a long time.
“If someone is remodeling and needs to borrow money, they should decide if their home is worth more than the loan they have,” Reynolds said. “If they’ve paid it down some or if the house value has gone up a good bit, this might be a good time to add those improvements.”
Not everyone can benefit from refinancing, though. Reynolds said it can be harder for people who have lost a job or income because of the coronavirus to qualify for refinancing.
The refinancing process
If you’ve decided to refinance, the next step is to find the right deal. There are plenty of resources online and over the phone to evaluate your financial situation. Neighbors, friends and family can often connect people looking to refinance with experienced lenders.
Check out online tools, too, like a mortgage refinancing calculator to understand how much refinancing could save or cost you. There are also online lending services, but be wary of high fees.
The most important piece of advice is to not settle on the first refinancing opportunity you see. Shop around because lenders offer different rates, charge different fees and have different qualities that could make or break the refinancing process for you.
Mortgage refinancing is similar to the home-buying process. You have to qualify for a loan, file an application, go through the underwriting process and go to closing. Here’s what you can expect step-by-step.
Set a goal: Determine what outcome you want from refinancing. Ask yourself why you’re refinancing, and decide if it’s worth starting the process.
Shop around for the best deal: Ask neighbors, trusted friends and family members about their refinancing experiences. Visit local and online lenders to figure the cost of refinancing.
Find your lender: Pick which lender is best for you, and establish a relationship.
Lock in your interest rate: When you lock in your interest rate, it cannot be changed during a certain time period. You’ll want to close before the rate lock expires.
Close on the loan: This is the last step. You’ll pay the closing costs that you and your lender agreed on. It’s similar to closing on a purchase loan.
Refinancing can be a great choice if it reduces your mortgage payment, shortens the term of your loan or helps you build equity more quickly. It can also be a valuable tool for bringing debt under control if you’re careful.
Before you refinance, take a careful look at your financial situation and look for reputable help from a local financial institution or an online lender. Remember to ask for advice, check fees and shop around before settling on a lender.