With interest rates at historic lows, home loan applications have surged in recent months. For many homeowners, refinancing can deliver significant savings over the life of the loan. Refinancing your home provides an opportunity to take advantage of lower mortgage rates, change the type or the term of the loan, consolidate debt, or adjust your monthly mortgage payment. Refinancing can be a great opportunity to free up extra cash each month to use for emergency funds, or to finance home improvement projects to raise the value of your home should you ever decide to sell.
However, refinancing can have serious drawbacks if not carefully thought through. A good place to start is initiating a conversation with a loan officer, who can help evaluate whether the potential long-term benefits will be worth the short-term costs, using a cost benefit analysis. During uncertain times it can be tough to think about tomorrow, much less months or years down the line. But when it comes to improving your financial prospects tomorrow, a little planning today might just be the best investment you'll ever make.
- Don’t rush into a big decision. Low interest rates can have homeowners rushing to refinance, but remember the adage that just because you can, doesn’t mean you should. You have to be sure that refinancing will be worth it in the long run because recovering the fees, appraisal and other loan closing costs associated with refinancing takes time. A good rule of thumb, says BSF Vice President for Mortgage Lending Kellye Cornette, is that you should be able to receive at least a 1% reduction on your current interest rate, before you should consider refinancing. Even with a 1% difference it will take three to five years to recover the cost of refinancing, so unless you have more than six years remaining on the term of your loan, Kellye says, you won't see much benefit. But if you have a thirty-year loan with twenty years left to run, and are looking to refinance for fifteen years, the savings can be well worth the cost, explains Kellye. Otherwise it might make better sense to simply add to your monthly payment. For example, if you have a twenty-year mortgage and the balance is $200,000 at 4.5% interest, adding $250 to your monthly payment will save more than $27,000 in interest over the life of the loan, and you’ll pay off your loan almost five years earlier. Wondering how refinancing a mortgage could change your monthly payment and loan term? Click HERE to utilize BSF's refinancing comparison calculator.
- Documentation and communication are key. Refinancing a mortgage requires a new appraisal. To be prepared, gather thorough records of any renovations or improvement work done to your home while you've owned it. In addition, you'll need to be able to provide documentation to explain any gaps in your income, such as job loss or parental leave, to your lender. Most importantly, keep records of all communication regarding your loan application. The paperwork part isn’t fun, but documenting every move will prevent delays in processing your application, which depends on how quickly you can provide the required information. Communicating thoroughly and often with your loan officer also ensures that you'll be aware of all options available to you. For example, if you're interested in refinancing to fund a home improvement project there're various ways to go about obtaining the neccessary funds, including a permanent refinance (or fixed rate) option, or a Home Equity Line of Credit. Kellye can walk you through the pros and cons of each approach.
- Don’t make any big changes to your finances (and pay your bills on time). When a financial windfall comes your way the temptation to make a large new purchase—like a car, a vacation or a boat—can be stronger than ever. Remember, though, that lenders will be looking at your credit report throughout the refinancing process. To ensure your application isn’t held up, don’t open any new lines of credit until the loan is finalized. Make sure to keep all your existing accounts current, too. Late payments are a red flag you don't want waving over your credit report.