If plummeting interest rates and a desire to save money have you thinking about refinancing your home, be sure to answer some key questions before taking the leap with a lender.
It’s true that mortgage interest rates remain enticingly low, but that doesn’t mean you should automatically refinance. In fact, interest rates for 15- and 30-year fixed mortgage rates have crept up since hitting a historic low in January 2021. Just a year ago, they were a full percentage point higher! But if rates continue to rise, refinancing will look less attractive to homeowners.
If interest rates were your only consideration, now would be a great time to refinance. In reality, though, you should look at the bigger picture to see if all signs point to yes. Your personal finances, living plans and long-term goals all have the potential to tip the scales one way or the other.
Refinancing is no small undertaking, so you’ll definitely want to do your homework before going through the trouble of applying for a new home loan. On the subject of homework, if you were to sketch out a home refinancing equation on a chalkboard, there would be multiple variables. Plugging those in and doing the math will give you the confidence to move forward if conditions are favorable.
So is refinancing a good idea? Well, let’s find out. And if so, what are the next steps? By answering three critical questions, you’ll know if a refi is right for you, how to lock in a low rate and what documents you’ll need to gather in order to breeze through the loan process.
1. When does it make sense to refinance your home?
As we’ve already noted, there’s a right time and a wrong time to refinance your home mortgage. Low interest rates are a great catalyst, but you’ll need to take some other factors into account before taking the plunge. Be sure to look closely at these four criteria to see if a mortgage refi makes financial sense for you.
Home Equity
Home equity is a beautiful thing, especially when you’re looking to refinance. If you made a sizable down payment on your home when you bought it or have been paying down your mortgage for several years, then you probably have quite a bit of equity.
Home equity is the portion of the property you essentially “own,” and a higher percentage makes you a more attractive borrower to banks and mortgage lenders. For refinancing, you’ll want at least 20% equity in your home. Hitting this benchmark can eliminate the added cost of private mortgage insurance and unlock lower rates.
Closing Costs
Refinancing your home involves several professional parties, all of whom charge fees for the respective services they provide. Collectively, these are known as closing costs, and if they’re too steep, refinancing your home may not be worth it. This fixed expense is often what makes or breaks your refi hopes.
Typically between 2% and 5% of the loan amount, closing costs could easily amount to several thousand dollars. That’s real money coming out of your pocket. If you don’t pay these costs upfront, you can typically roll them into the loan, which means paying even more interest over time. Ask lenders for estimates on closing costs so you can figure them into your formula and determine if they’re a deal breaker.
Credit Score
Home equity isn’t the only way to bring your mortgage interest rate down when refinancing. Lenders will also look at your credit score, and the higher it is, the better off you’ll be. A perfect credit score is 850, and the average credit score for all mortgage loans closed in December 2020 was 751. Generally speaking, a score of 700 or above is considered good.
If you have a lower credit score, you may want to take steps to improve it before refinancing your home. Delinquent bills, heavy consumer debt and credit report errors can all drag your score down. Be sure to check your credit before you start the refinancing process; it’s free and won’t count against you.
Living Plans
How long do you plan to stay in your home? If the answer is less than three years, then refinancing your home probably isn’t worth it. Recouping your costs takes time, so your roots should be firmly planted—at least for the foreseeable future.
When you refinance, you’re paying more in the near term so you can benefit in the long run. The break-even point is when you transition from paying to saving, and it’s another variable you’ll want to calculate. All you have to do is divide your monthly savings into your refinancing costs. Need a visual? Closing costs ➗ decrease in monthly payments = number of months to break even. Easy peasy.
2. How can I get the best refinance rates?
As we’ve already covered, you’ll want to maximize your home equity and get your credit score in tip-top shape. Then it’s time to start doing some serious shopping. There are plenty of banks and lending institutions that want your business, but which one really has your best interests in mind?
Your local bank is a great place to start. Go with what—and who—you know. At Community Point Bank, our loan officers have a track record of helping customers find competitive mortgage refinancing rates. Schedule an appointment or stop by one of our convenient locations to start the conversation.
As with any large purchase, you’ll need to know some specifics before you can make a sound decision. When you have your top three to five lenders selected, request loan estimates for an in-depth comparison. That means apples to apples, so request the same type of loan and details, such as rate type, term, down payment, rate lock period and points/credits.
Loan estimates are usually free, although some lenders might charge you a nominal fee to pull your credit report. Be sure to request estimates in the same 45-day period, as credit bureaus will treat multiple checks from lenders during this time as a single inquiry.
3. What do I need to refinance my house?
If refinancing your home is indeed a good financial move and you’ve settled on a lender, it’s time to formally apply for the mortgage loan. But—as anyone who has applied for a home loan knows—you’re going to need several documents to pass muster. Here’s a checklist to help make the process easier:
- A completed application
- Pay stubs for the last 30 days
- Tax forms such as W-2s or 1099s
- Your credit report, which the financial institution will obtain
- Bank and investment portfolio statements detailing your financial assets
- A current property appraisal, which the financial institution will obtain
- Some banks may ask for monthly statements for debt, including your current mortgage, student loans, car loans and credit cards
Refinancing your mortgage is just another exciting step in the journey of homeownership. We wish you the best of luck in your efforts to realize the American dream and keep as much money in your pocket as possible!
