Don't let mortgage rates distract you. You should also consider this when refinancing
Now is the perfect time to refinance your mortgage: rates are at a record low, and there are significant savings for consumers who take advantage of the low rate environment. Additionally, with future uncertainty surrounding the end of the coronavirus pandemic, many Americans are looking for a way to reduce expenses and save more money -- refinancing your mortgage accomplishes both.
Online marketplace Credible is the perfect resource to search for mortgage refinance rates and compare lenders' terms and fees. You can see what kind of rates you qualify for today within just minutes.
But don’t let the hurry to get the best rate distract from all the necessary due diligence required for taking on a new loan. Many homeowners look for the best rate, but this isn’t the only consideration when investigating if a mortgage refinance is the best option.
Refinancing your mortgage: 4 key things to consider
Mortgage refinance rates are very enticing right now, but don’t let the rate hook you in without doing the proper research. Below are the four most important terms to know, questions to ask, and key considerations when investigating a mortgage refinance.
1. Research different lenders
Why this is important: If the rates being offered are close to identical across the board, choosing between the pros and cons of one lender over another could be the difference between a great loan experience and a less than satisfactory one. Credible makes it easy to both compare rates between lenders and start the application process online.
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Questions to ask: Will you provide a loan rate lock? Will you be servicing the loan? How much time do you need to fund/close the loan? What loans does this lender specialize in? What are their lending requirements?
Consider this: Many lenders fund loans and then sell them to other businesses for servicing, meaning you could be dealing with a company you’ve never heard of. Also, many lenders have minimum credit score requirements, so be sure to check before applying to ensure you meet the criteria.
2. Look into loan fees
Why this is important: It costs money to take out new loans and this impacts the total amount saved by refinancing your mortgage. If the amount saved by refinancing doesn’t allow you to recoup your loan fees in a reasonable amount of time, it may not make sense to refinance. Use Credible's free online tools to find out what different lenders are offering and compare terms and services.
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Questions to ask: What are the discount points and origination fees? Can you provide a loan estimate? Is there a prepayment penalty?
Consider this: If you’re planning on using money saved by refinancing to pay off your mortgage faster, be sure to ask if there are any prepayment penalties on the loan.
3. Consider the length of loan
Why this is important: Refinancing to a new 30-year mortgage means the term starts the day your new loan closes, not the day you moved into the home.
Questions to ask: Is the length of the mortgage term more beneficial if refinanced or if left at the current term?
Consider this: Homeowners who have been in their current home longer than five years may want to weigh the pros and cons of a 15-year mortgage over the 30, especially if the equity in the home is substantial.
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4. If refinancing with less than 20% equity
Why this is important: Most lenders require at least 20 percent equity in the home in order to refinance, but not always. If refinancing without the 20 percent equity, the lender will require the homeowner to pay private mortgage insurance (PMI). With new loan fees and PMI, these could significantly eat into the total amount saved by refinancing.
Questions to ask: Does it make sense financially to wait until 20 percent equity is realized? Do I have cash on hand to get to 20 percent equity?
Consider this: If you have good credit, refinancing with less than 20 percent equity might be possible, but it’s especially important in this situation to run the numbers before applying for a loan in order to avoid costly mistakes.
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Always ask for the rate lock and loan estimate
When researching interest rates, keep in mind the numbers from an online aggregator like Credible are quotes. In order to lock in the rate and gain access to an actual loan estimate from a lender that includes fees and closing costs, you’ll need to start the formal application process.
And remember: locking in the rate is important. Most lenders should lock the rate for anywhere from thirty to ninety days. This is important as it gives borrowers time to shop. Ask your lender if processing times are higher given that mortgage refinance activity is so high and if they’ll extend the rate lock for longer in order to accommodate this increase in mortgage refinance activity.