With some of the lowest mortgage rates in decades, it’s very tempting to jump on the refinancing bandwagon. But there are do’s and don’ts to take into consideration before deciding to refinance, and your Investors Community Bank mortgage lender is more than happy to help evaluate your individual situation. The biggest thing I can say in my 18-year history of lending is that no two borrowers’ situations are alike.
- DO ask yourself, Why do you want to refinance? Often, it’s prompted by the availability of a lower interest rate and obtaining either a lower monthly mortgage bill OR a shorter mortgage. But that also may be paired with your desire for a shorter-term mortgage (15 years instead of 30, for example), to pursue a different type of mortgage (fixed-rate versus an adjustable rate mortgage, also known as ARM) or to tap into your home’s equity for that much-desired master bathroom remodel.
- DO evaluate a mortgage refi if you’re seeking to change from an adjustable-rate mortgage to a more predictable fixed-rate mortgage. If you plan to stay in your home for more than a few years, this is usually a smart financial decision.
- DO work with a mortgage lender you trust and with whom you have a relationship. If you have a lender who is responsive, communicative and has a variety of options to fit your personal needs, that’s a good combination. It’s important to work with a lender that offers exceptional customer service, knows the local landscape and understands its customers and their unique needs. In addition, it’s important to work with a lender you can contact after closing, with any questions you may have.
- DO assess how much less the interest rate now is from your current loan’s interest rate. If you are considering refinancing into the same term for a lower rate, a general rule of thumb is an interest rate reduction of 1%. But nowadays, even a 0.5% reduction may be worthwhile pursuing depending on the loan amount and other scenarios.
- DO determine all the costs of the refi; don’t solely look at the new mortgage rate percent. What’s the total cost to you to refinance? This includes not only the principal and interest on the potential new loan, but also the costs associated with an appraisal of your house, title search and of course, closing costs. Not all loans are the same; a no-closing cost mortgage could result in a higher mortgage rate; a higher closing cost could result in a potentially lower mortgage rate. Alongside your mortgage lender, calculate all these costs to determine if it’s a wise financial decision.
- DO consider how long you plan to stay in your home. It generally takes several years to recoup the money you lay out upfront on a refi in savings on your monthly payments. Work with your lender to calculate how long it will take you to recoup your upfront costs of a refinancing in savings on your monthly mortgage payments and determine if it’s a smart financial decision.
- DON’T apply for new credit during the loan process or change jobs. Let’s say refinancing is the smart move for your situation. If you decide to pursue the refi, don’t apply for any other new credit; this is not the time to buy a new vehicle or open a new credit card. Doing so can be a red flag during the refinancing process, requiring more documentation (at best) or creating a too-high debt-to-income ratio to qualify for refinancing. This also isn’t the time to leave your current employer for a new opportunity as it may require you to start all over with qualifying based on your new job and new income.
The ICB mortgage team is available to answer your questions and help evaluate your mortgage refinancing situation. Visit www.icbk.com/mortgages.html for more information or to contact a mortgage lender. We offer free consultations and three convenient ways to apply: in person, over the phone or our easy online application.