October 29th, 2020 1:26 PM by Jackie A. Graves
It’s no surprise that homeowners are rushing to refinance, as falling mortgage rates have made headlines for a few months. In fact, the average mortgage rate on a 30-year fixed-rate loan last week broke a record for the 11th time in 2020, falling to 2.8%.
Millions of homeowners still can save money by locking in a lower rate, but many are not sure it’s worth it. Right now, lenders are fielding an enormous amount of phone calls, applications, and requests, which is slowing down the application process and frustrating some borrowers.
Plus, Covid-19 has changed borrowing in a few ways, but probably not enough to make refinancing more trouble than it’s worth—especially if you’re one of the nearly 20 million homeowners who can save $300 or more per month by refinancing.
To help demystify the refinancing process, Forbes Advisor created a month-long event focused solely on refinancing, called “Refinance Roadmap,” which included a special four-issue newsletter that contained exclusive interviews, videos, tools, and more.
We concluded with a webinar featuring three mortgage and credit experts: Tasha Cochran, a lawyer, wealth expert, and founder of One Big Happy Life; Anna DeSimone, the author of more than 40 books and best practice guides for industry professionals on fair and responsible lending; and Rod Griffin, the senior director of consumer education and advocacy at Experian, the largest credit reporting agency in the U.S. The discussion was moderated by Natalie Campisi, a mortgage analyst at Forbes Advisor.
Here are three of the group’s top takeaways from the event, which you can watch on Facebook.
Everyone’s Circumstances Are Different, But Refinancing Principles Are the Same
Many borrowers get hung up on the particulars of their situation, which leads them to believe refinancing is complicated. The experts explain that refinancing is pretty straightforward. For borrowers, the goal is simple: You want to save more than you spend. For lenders, the game is just as simple: The most creditworthy borrowers get the lowest rates.
This means you need to figure out two things:
The first step, Cochran says, is to compare your current interest rate with current average interest rates. Many lenders will advertise what their current rates are. If you can shave off one percentage point or more then that’s a good sign you should consider refinancing.
“Chances are because we are at record lows right now, you will see a difference between your current rate and what’s available. So, that’s an opportunity for you to start digging deeper,” Cochran says.
Before you start shopping for lenders, keep in mind that refinancing fees are expensive, costing between 2% and 6% of your total loan amount. That means if your fees on a $200,000 refinance are 3% of the loan, you’ll end up paying $6,000. So you want to make sure it’s worth it. If you plan on moving within five years or if you’re at the end of your loan, then refinancing is probably not a great move. Be sure to go over the numbers based on your situation. Experienced loan officers also can guide you through the process and make sure you’re meeting your financial goals.
If the numbers show clear savings, then it’s time to look at your finances. You can get a free credit report, but it won’t include your credit score, which lenders look at. Some credit card companies and banks will offer free credit scores for customers, otherwise, you’ll have to pay for them. Typically, borrowers need a minimum 740 FICO score to get the lowest mortgage rates available.
You’ll also need to look at your debt-to-income ratio (DTI), which is how much debt you owe compared to your income. Griffin says that most lenders are looking for a DTI of around 36%. You can use a debt-to-income ratio calculator to see where yours is. Basically, to lower your DTI, you want to either pay off debt or boost your income (while not incurring additional debt).
Think Twice Before You Get Into a 15-Year Mortgage
The benefit of a 15-year mortgage is that they come with lower interest rates. Also, you’re paying off your mortgage faster so you’ll end up paying less interest. The downside is that monthly payments are higher than mortgages with longer terms, like 30- and 25-year mortgages.
You may be tempted to go with a 15-year mortgage if you can afford the higher payments, but that’s not always the best course for all borrowers. A 15-year mortgage may both limit your flexibility in troubled times, Cochran says, and also eat up money today that might be better invested elsewhere.
“When you lock yourself into a 15-year mortgage you take away all your flexibility, meaning that you have to meet that 15-year payment no matter what else is happening in your life if you want to keep your house,” Cochran says. “The truth is if you opt for a 30-year mortgage you can still make the payment as if it were a 15-year mortgage and you’ll still pay it off in 15 years and, yes, you might pay a little bit more in interest, but think about how much less financial stress you will have.”
The other angle is that dedicating the bulk of your money toward a low-rate loan means you might be sacrificing higher earnings elsewhere. If you can find an investment that offers a higher return than your mortgage rate, you can pocket the extra for yourself. One example Cochran gives is passive investing low-fee index funds, with average annual returns of 10%.
Shop Around Because Lenders Have Different Risk Tolerances
Experts agree that shopping around is how you’ll get the best rate possible. Start with the bank where you have your mortgage or a checking or savings account. Find out if they offer discounts to existing customers. Mortgage brokers will do the comparison shopping for you, but you’ll have to pay a broker’s fee, which can run between 0.50% to 2.75% of the loan amount.
If you apply for refinancing with multiple lenders within a couple of weeks, you don’t have to worry about your credit score taking a big hit. Credit-reporting companies will consider those applications as one query.
Your loan estimate will give you a general idea of how much you’ll pay, however that can change as you continue through the refinance process. When in doubt about fees or practices, get a second opinion from a financial advisor or another trusted expert.
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