Wednesday, November 23, 2022
You can save some money if you refinance your home, but whether refinancing is the right course for you depends on factors that you may not have considered. In addition to carefully weighing the pros and cons of refinancing, you also need to approach the transaction in a strategic way. Making mistakes in the process or not looking at all of your options can be costly, and could even result in your application being denied. If you’re thinking of refinancing your home, avoid making these mistakes.
Many homeowners opt for cash-out refinancing so they can use a portion of the home’s equity for cash. However, James Hecht, executive vice president of national retail lending at Caliber Home Loans in Coppell, Texas, warns against using refinancing as a crutch to avoid budgeting, reining in expenses, and saving money for a rainy day. “A cash-out refinance can mean big savings if you’re using the cash to pay down high-interest debt like student loans,” he admits. That said, Hecht advises homeowners to be careful when using the cash to pay off credit cards or personal projects. For example, if you pay off your credit cards and then max those cards out again, you’ll be in worse shape than when you started. “In this instance, it could lead to more debt if you use it as a crutch,” Hecht explains.
Mortgage rates are still relatively low, for now, but some homeowners are waiting to see if they’ll drop even further. “Waiting for mortgage rates to drop can be a gamble because there’s no guarantee rates will go lower,” Hecht says. “Every day you wait for rates to drop further is another day you risk missing out on a great opportunity to save on interest payments.” He warns that the housing market can change at any time, and you could end up missing out on the best rate.
Before you refinance your home, it’s important to determine if or when you plan on selling it. If you’re not staying long, refinancing might not be worth it. “It’s important to remember that you will be paying new closing costs with a home refinance, so you want to make sure that you will be in your home long enough to recover those costs,” Hecht says. “For example, if your closing costs are $2,000, but you’re saving $200 per month with a refinance, as long as you plan to stay in your home for more than 10 months, it makes sense.”
If you choose to refinance, you also need to decide whether you are going to refinance a loan at a new 30-year loan term. “This may lower your mortgage rate and thereby reduce your monthly mortgage payment,” Hecht explains. “However, it may make more sense to change your loan type and term. This allows you to reduce the term of your mortgage and pay it off faster, which saves you money in the long term.” And, he notes, there’s yet another option: You can lower your rate, but set the term of the new loan to match your current remaining term. “For example, if you’ve had your current 30-year loan for 3 years, your new term could be set to 27 years,” Hecht says.
Those finance fees are really important. How important? According to Andrina Valdes, chief operating officer of Cornerstone Home Lending in Houston, Texas, the fee amount may determine if refinancing is worth it. “For millions of homeowners right now, refinancing could significantly lower their monthly mortgage payment, but those up-front costs could potentially increase the finance charges over the life of the loan,” she warns.
Some homeowners assume that they haven’t been in their home long enough to refinance, but Valdes says this may not be a disqualifying factor. “We see homeowners refinance even as relatively new owners, simply because rates have dropped so dramatically within the past year,” she explains. If you can refinance and reduce your rate to under 3 percent, she says it’s probably a good idea to explore refinancing options.
If you’ve improved your credit score, Valdes says that this could positively impact the rate that you would qualify for when you refinance. “But if you haven’t, or if your credit has recently taken a hit, it may not be the optimal time for you to refinance,” she warns. Instead, focus on raising your credit score so you’ll be able to get the best rate when the time comes.
Remember when you originally purchased your home and you were advised not to make large purchases until the mortgage was approved? Consider this déjà vu. “Just like with buying a house, this is not the time to make big purchases like a new car or boat,” warns Valdes. “It’s possible that any big financial changes could delay the closing of your refinance, as these purchases can impact your debt-to-income ratio and change your financial picture.”
Closing costs aren’t inevitable when refinancing your home. Dan Green, CEO of Homebuyer.com, a digital mortgage lender for first-time home buyers, recommends asking your lender about a zero-closing-cost refinance. So, how does it work? “In a zero-closing-cost refinance, your mortgage lender pays your closing costs on your behalf in exchange for raising your mortgage rate,” he explains. “In most states, with a typical mortgage loan size, a 0.25 percentage point increase to your rate will cover all of your costs.” Admittedly, he says, this increase means that you’ll pay more to your lender each month. “But your loan size won’t increase, and you won’t have to go out of pocket; that is why zero-closing-cost refinances are a terrific option in a falling mortgage rate environment,” Green explains.
We get it: You’re busy. But delays during the refi process could cause you to lose out. “On the day you reserve your mortgage rate, your mortgage lender will tell you for how many days your mortgage rate will be honored—and usually, it’s 30 days, 45 days, or 60 days,” Green says. If you miss that deadline, you could lose your mortgage rate. To be on the safe side, he recommends doing everything as soon as you’re asked. If you need to sign a document for the lender, stop and do it as soon as the document arrives. When you’re asked to schedule a signing date, stop to schedule it immediately. “Don’t delay during your refinance. Do it right now.”
You may be tempted to tell what you consider little white lies on your refinance application, but Green warns against it. “Be honest, open, and truthful on your mortgage application because to lie is to commit mortgage fraud, which is a federal offense.” Don’t forget that the lender will verify the information with third parties. “If the lender finds a rounding error or math mistake, no big deal,” he says. “But glaring omissions or outright fabrications will move your loan into the trash and potentially get you a call from the government.”
Refinancing is one of the most powerful tools in real estate. Most jurisdictions, it is a tax exempt event also, meaning, money that is pulled out of a property because of a refinance is not taxable! ALL real estate investors use cash out refinancing to help speed up the growth of their portfolios. If you are not a real estate investor, but want to get into the game, refinancing your home to help kick start your portfolio is a great strategy, but be cautious, the refinance is still debt, be smart with the money, and be sure to reinvest the money, or pay down bad debt with it. Until next time, happy real estate hunting.
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