With interest rates as low as they are, I have been getting lots of questions from home owners interested in refinancing their mortgages. This is certainly not surprising, considering the average interest rate for a 30-year fixed rate loan is around 3.27 percent, as of the date of this writing.
Of course, interest rates can vary significantly according to a borrower’s income or financial situation. Similar to many other aspects of business and major life decisions, there are many variables involved with a refinance. This is why it’s key to start the process from a position of knowledge instead of uncertainty.
With that in mind, here are some questions that my clients frequently have for me, along with some valuable tips for saving money when refinancing a home.
- Don’t restart the clock. Doing a refinance to cash in on lower interest rates doesn’t necessarily mean that you have to get another 30-year loan. Many lenders these days have flexible guidelines that allow them to create a new loan and deed of trust for a differing number of years than the traditional 15-year and 30-year formats. If that is not an option, then a good course of action is to make an additional payment on the principal each month. This will shorten the payoff period and make a substantial difference over the long-term.
- Avoid paying closing costs. Seeking the lowest interest rate possible can actually result in significantly higher costs. In many cases a borrower’s lower-interest-rate option is accompanied by a large number of points and fee amounts, while the borrower’s slightly higher-interest-rate option has no fees and can even include additional rebate funds. Understanding that it is not unheard of for a borrower to spend up to $7,000 buying a lower interest rate, it is easy to see why opting for a loan with a slightly higher rate is a great choice for most situations. It may seem counterintuitive to think that a lower rate and a lower payment can cost more over the long-term, but that is the reality of the situation when closing costs are a factor.
- Choose a fixed rate. It’s not a good idea to get a loan product that includes a floating interest rate, with the hope that rates will fall in the future. There is no guarantee that rates will fall and if economic storm clouds suddenly began to form, the interest rates and costs could increase dramatically.
- Shop around. Turning to friends, family and your social network for guidance regarding their favorite financial institutions or mortgage brokers is always worthwhile. It is important to note, however, that each inquiry from a creditor can reduce your credit score by two to five points. To increase the chance that several inquiries might only count as one, make sure to have your shopping and all of the inquiries performed in a 15-day time period.
- Get a second and third opinion. Don’t give up if a lender tells you no. It is not uncommon for lenders to have different guidelines regarding eligibility. If it gets to the point where you have basically received the same answer from at least three sources, however, it may be time to ask for help to identify a solution to your credit issues.
For additional help or guidance about how to refinance your mortgage, please contact me at the number below.
Patrick Stoy (NMLS Numbers 39527 and 39166) has 16 years of mortgage lending experience. Patrick is CEO of Wilmington-based Market Consulting Mortgage, which he started in 2005 with a mission to build lifelong customer relationships by providing real value. To learn more about Marketing Consulting Mortgage, visit www.macmtg.com. Patrick can be reached at [email protected] or 910-509-7105.