Mortgage Refinance Tips to take Advantage of Low Rates
According to this article (Mortgage rates have fallen to a record low), we are at historical lows that will likely allow you to refinance at a lower rate. Read on to receive mortgage refinance tips.
Unlike buying a new house, townhouse or condo where you lock in at the rate available at that time, the option to refinance is left to you.
The rule of thumb is to start thinking about refinancing if the rate is .75% or 1.0% lower than your current rate. It is not always a no-brainer to refinance especially as there are refinancing costs to factor in.
Benefits of a Mortgage Refinance
By locking into at a lower rate, there are benefits such as lowering your monthly mortgage payments and saving on the overall interest paid throughout the loan.
As an alternate path, there are options to reduce the overall length of the loan positioning you for a healthy retirement.
There are many calculators such as the one provided by Nerdwallet (Refinance calculator) that help you calculate the possible monthly savings.
As an example, by refinancing from 4% to 3% for a $200k loan, the monthly savings will be about $200/month.
Now onto the refinance tips.
Refinance Tips
Tip 1: Keep an eye on the interest rates
Before you spend much time evaluating whether to refinance, check out the rates first. If the rates are not .75% or lower, you should feel good about your current mortgage situation and wait for another day.
If the current rate allows you to drop greater than 1% or more, it is time to begin looking at your options. Don’t procrastinate as rates can go back up and you will likely miss on significant savings.
There are multiple sites that help you track trends and ongoing rates such as Quicken Loans.
Tip 2: Understand your options
Length
Many people opt for the 30-year mortgage vs 15 or 20 year as it provides the lowest monthly payments. This may help you afford a bigger house or have more discretionary income.
By having more discretionary income, this is helpful to invest in yourself (Strategies to manage your money and grow your nest egg), your kids (Beginner’s Guide to 529 College Savings Plan) or other things.
If you are close to retirement or have had a mortgage for a long time, you may want to consider taking a shorter length loan such as 15 years.
Loan Amount
If there is a lot of equity in your home, you can refinance and actually take on a larger loan and receive cash back.
A common reason to do this is to afford a large purchase such as remodeling your home.
Tip 3: Getting the best deal
Assuming the rates are now in your favor, find a good mortgage broker to work on your behalf.
Speaking from personal experience, it is nice to have the mortgage broker to ask questions, analyze your situation, help you with the paperwork, and get you the best rate.
If you do not know any mortgage brokers, you can get recommendations by contacting your realtor, coworkers or neighborhood friends.
There is no cost for asking the mortgage broker to provide you with the best rates. I suggest reaching out to 2-3 different brokers as they will vary with their charges and the rates they can get you.
As an alternative to mortgage brokers, there are online sites that also provide various mortgage refinance options such as credible.com.
Before locking into a new loan with your mortgage broker, be sure that the rates and closing costs are competitive by validating this against the online sites.
Tip 4: Getting ready
When applying for a new loan, it can take weeks or even months to process. To make this a smooth process, you can prepare ahead of time.
Paperwork needed
My mortgage broker requested W2’s for last 2 years, recent pay stubs, bank statements, copy of ID, current mortgage statement, and insurance agent info.
Transferring Documents
My broker offered a secure online drive to drop these documents into vs just emailing back and forth.
Since your documents contain sensitive information, I suggest assigning a password and encrypting them as a security precaution. Here are instructions to do this (Protect a document with a password).
As one of the final steps, there are multiple legal documents to fill out with your titling company. I was able to request the title company to come to our house to complete the in-person signatures.
Deciding who to include on the loan
If you are a single income family or have significant equity in your house already, you may be able to file for the refinance under one person. This makes the paperwork easier.
There are other factors to consider such as if you or your spouse have a poor credit score. This could adversely impact the rate you receive on your refinance.
Tip 5: Determine the best option for your situation
Depending on factors such as being early in career or just starting a family, it will likely be a no-brainer to refinance for a 30-year loan. However for my case, I took a different route.
My Refinance Situation
My current mortgage was locked in at a low rate (3.375%) and I was about 7 years into a 30-year loan.
At that time of my latest refinance, my mortgage broker was able to find a 30-year rate at 2.575% and 15-year at 2.375%. The cost to refinance was very manageable with about 6 months return on investment.
This presented an interesting situation for me as I could save about $450/month starting a new 30-year loan or pay additional $350/month to refinance to a 15-year.
The big question for me was to decide whether I would use the extra $5400/year to invest in the stock market or pay an additional $4200/year to bring down the mortgage length down from 23 years to 15 years.
Ultimately, I decided to go with the 15-year mortgage. The attraction to have a paid off house by the time the 2nd kid enters college was very appealing.
In addition, my family’s financial state has improved due to dual incomes and saving aggressively since getting married.
Since I had a lot of equity in the house, I was able to roll the mortgage closing costs into the loan which was nice as I had to pay nothing out of pocket.
Lastly, this was very smooth as the process took about 3 weeks from start to finish. Almost all of the paperwork was done digitally which was especially nice due to the ongoing pandemic.
Reach out to a financial advisor or ask your mortgage broker for advice if the decision is not straightforward. You will want to look holistically at your financial situation to decide on the best option for you.
Summary
This article provides refinance tips to take advantage of low mortgage rates.
Here is a summary of the tips:
- Keep an eye on interest rates and think about refinancing if the rates are at least .75% lower than your current loan
- Evaluate your options such as length and loan amount
- Get the best deal by utilizing mortgage brokers and validating through online sites
- Expedite the process by preparing all the necessary paperwork and deciding who to include on the loan
- Determine the best refinance option by holistically looking at your financial situation
About DadMBA: Through his schooling (he does have a MBA) & more importantly being a Dad, he has provided practical advice to family & friends on finances & other life topics. He loves helping others thus the creation of DadMBA.
