Real estate owners may have decided to refinance their mortgages, but first need to have questions answered about when the best time to do it is and how to navigate that complex process of repaying the current mortgage and taking on a new one. Those questions are no surprise since lenders now provide a growing number of choices for refinancing. Here’s some advice on factors to consider in the timing of the refinancing, how to search for the best kind of mortgage for your objectives and what terms and conditions you could be negotiating for the best deal.
There are myriad reasons why homeowners make the decision to refinance their mortgages, including availability of lower interest rates, a rising interest rate on an adjustable rate mortgage (ARM), improved personal financial condition which in itself can qualify applicant for lower interest rates and better terms. Other reasons may be the need to cash out the equity and the introduction of new kinds of mortgages such as Fannie Mae’s Timely Payment Rewards™. Those objectives are what you have to keep the focus on as you sort through the issues associated with timing and what your real options are.
When to apply for refinancing, or as they say “pull the trigger,” primarily depends on four factors:
Interest rates: Rational homeowners want to lock in the lowest rate, but it is impossible even for the experts to predict with certainty if rates will go lower in the near future since they are influenced by interrelated variables such as market liquidity, financial markets, inflation, unemployment, the value of U.S. currency and yields on 10-year Treasury notes. Therefore, refinancing will always involve some degree of interest-rate risk.
Equity level: Many lenders require about five percent equity in the house for refinancing eligibility. Since equity represents the difference between the fair market value and the amount of the mortgage, if your property is assessed at less than the mortgage, you cannot refinance at the current time. If real estate prices increase in your neighborhood or if you pay off more of your mortgage then you would be eligible for refinancing in the future.
Personal finances: The interest rate as well as the loan’s other terms and conditions is correlated with your individual financial data such as income and longevity of employment or business ownership, credit rating or FICO score, debt level and repayment history on all bills ranging from mortgage to credit cards. If you are expecting a major negative change such a layoff, the timing could be right to refinance before that happens.
Personal/professional plans: Because “closing costs,” as they are broadly referred to, can total two to four percent of the loan, it’s not cost efficient to refinance, at least not with a traditional fixed mortgage, unless you are reasonably sure that you will own that property for the long term. If your personal and professional plans are uncertain, such as if you may divorce or relocate for professional reasons, this is not the time to refinance.
Just as with your search for the original mortgage, the refinancing process involves plenty of energy invested in learning about the best kind of loan for you and then negotiating the best terms and conditions. The monetary stakes are high since not doing your homework can result in high transaction expenses, an unfavorable interest rate and what might be unnecessary tradeoffs such as agreeing to a higher interest rate in exchange for no prepayment penalty. Here are the major issues you need to address:
Type of mortgage: The first step is to investigate the options available – they are always increasing – and which is the best fit for your current needs. The 30-year fixed with a low interest rate and low closing costs may not be it if you only intend to stay in the property for a few years, in which case an ARM with low teaser rate and no prepayment penalty might be ideal. This search, if done comprehensively, also will turn up special opportunities such as Farmers Home Administration (FMHA) mortgage for rural areas as well as InterestFirst™ loans for those not planning to put down roots.
Lenders: Once you have narrowed down the general type of mortgage that is right for you, then select a number of lenders to interview about that one kind of loan. During this, don’t neglect to consult with your present lender. You can create that list by checking their information online and their reputation through online reviews and word of mouth. Remember what lenders promote as their terms and conditions usually are only available to those with excellent credit. That’s why you need to talk with several to find out what they will actually offer you.
Making systematic comparisons: There can be vast differences in the packages lenders will initially offer to you and which you can attempt to renegotiate, so here are the key items you must methodically compare among them:
- Interest rate: What is being offered as rock bottom rate? Usually this isn’t set in stone and is open to negotiation such as bypassing a conversion clause on an ARM for a lower teaser rate.
- Points: How much of the “points” is the lender willing to finance as part of the loan? You may not be able to pay this upfront. Refinancing lenders often require a percentage of the total loan amount as a kind of down payment expressed as points which begin at one percent and with more points added the interest rate can be less.
- Lock Ins: Since interest rates fluctuate daily and the loan may take more than 60 days to close, you must ask when the rate will be locked in, if there is the option to take advantage of a lower rate which might become available before closing, and how much do such provisions in the contract cost you.
- Equity required without private mortgage insurance (PMI): Usually PMI is required for mortgages which are for more than 80 percent of the property’s value. In some cases PMI can be eliminated through negotiation, which therefore should be high on your list of priorities in what you want from a lender.
- Prepayment penalties on current and new loans: These can add thousands of dollars so their existence and amounts determine whether to refinance at all and, if so, with what lender. You want a loan without this kind of restriction.
- Closing costs: Those expenses which come under the umbrella of “closing costs” involve countless transaction fees associated with financing real estate, including the credit report, application, loan origination, title search, legal services and transfer taxes. Some lenders will waive all or some of these, others will not. Since they can add up to thousands of dollars, the lender’s terms regarding them can be the deal maker or breaker.
(Also read: The Pros & Cons Of Refinancing A Mortgage.)
After you investigate what lenders will offer you, you might decide that the timing is not right for you to refinance and you could spend the next half year repairing your credit and bringing in more income. Or you might recognize that you are well positioned in your personal finances to negotiate and “pull the trigger.”
With so much economic volatility in the 21st century, there is no perfect time or perfect deal for refinancing. However, the odds are better for getting the mortgage you need if you do your homework and approach negotiations as the important business transaction that it is.