Four terms to know and the most important questions to ask when refinancing a mortgage. (iStock)
Now is the perfect time to refinance your mortgage – rates are at a record low and there are significant savings for consumers taking advantage of the low rate environment. Furthermore, with the future uncertainty surrounding the end of the coronavirus pandemic, many Americans are looking for a way to cut expenses and save more money: refinancing your mortgage does both.
The Online Credible Marketplace is the perfect resource for searching mortgage refinance rates and comparing terms and rates of lenders. You can see what kind of rates you qualify for today in minutes.
But don’t let the rush to get the best rate distract you from all the due diligence necessary to get a new loan. Many homeowners look for the best rate, but this is not the only consideration when researching whether a mortgage refinance is the best option.
Refinancing your mortgage: 4 key things to consider
Mortgage refinance rates are very attractive right now, but don’t let the rate catch you up without doing the proper research. Below are the four most important terms to know, questions to ask, and key considerations when researching a mortgage refinance.
1. Research different lenders
- Why this is important: If the rates offered are almost identical across the board, choosing between the pros and cons of one lender over another could be the difference between a great credit experience and a not-so-satisfying one. Credible makes it easy to compare rates between lenders and start the online application process.
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- Questions to ask: Will it provide a loan rate lock? Will the loan work? How long do you need to finance / close the loan? What loans does this lender specialize in? What are your loan requirements?
- Consider this: Many lenders finance loans and then sell them to other companies for repair, which means you could be dealing with a company you have never heard of. Also, many lenders have minimum credit score requirements, so be sure to check before applying to make sure you meet the criteria.
2. Examine loan rates
- Why this is important: It costs money to get new loans and this affects the total amount saved by refinancing your mortgage. If the amount saved by the refinance does not allow you to recover your loan fees in a reasonable period of time, it may not make sense to refinance. Use Credible’s free online tools to find out what different lenders offer and compare terms and services.
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- Questions to ask: What are the discount points and origination fees? Can you provide an estimated budget? Is there a prepayment penalty?
- Consider this: If you plan to use the money saved through refinancing to pay off your mortgage faster, be sure to ask if there is a prepayment penalty on the loan.
3. Consider the duration of the loan
- Why this is important: Refinancing a new 30-year mortgage means the term begins on the day your new loan is closed, not the day you moved into the house.
- Questions to ask: Is the length of the mortgage term more beneficial if it is refinanced or left on the current term?
- Consider this: Homeowners who have been in their current home for more than five years can weigh the pros and cons of a 15-year mortgage over 30, especially if the equity in the home is substantial.
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4. If you refinance with less than 20% of the capital
- Why this is important: Most lenders require at least 20 percent equity in the home to refinance, but not always. If it refinances without the 20 percent principal, the lender will require the owner to pay for private mortgage insurance (PMI). With the new loan rates and PMI, these could significantly reduce the total amount saved by refinancing.
- Questions to ask: Does it make financial sense to wait until 20 percent of equity is realized? Do I have cash available to reach 20 percent of the capital?
- Consider this: If you have good credit, a refinance with less than 20 percent equity may be possible, but it is especially important in this situation to run the numbers before applying for a loan to avoid costly mistakes.
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Always request rate lock and loan estimate
When researching interest rates, keep in mind that the numbers from an online aggregator like Credible are quotes. To secure the rate and gain access to an actual loan estimate from a lender that includes closing fees and costs, you must begin the formal application process.
And remember: blocking the rate is important. Most lenders should set the rate for thirty to ninety days. This is important as it gives borrowers time to shop. Ask your lender if the processing times are higher since the mortgage refinance activity is so high and if they will extend the rate lock for longer to accommodate this increase in the mortgage refinance activity.
