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Historic Lows?? Is a Home Refinance the Best Move?

This has been a year full of ups and downs across many different aspects of life. Since COVID-19 has started people have lost jobs, started jobs, changed career paths, and gone on unemployment. This has been some of the worst months for certain people and some of the best for others. Due to all of the changes going on right now and that continue to happen one of the biggest questions on everybody's mind is, "Should I refinance my home?", "Will a lower monthly payment help us get through these harder times?", "Will a shorter loan term give me more money for the future?", "Does paying less interest matter to me?". Everybody has questions about this new uncertain future and hopefully some of the information belong will hope answer that for you, and if not feel free to reach out and we can discuss your specific situation. 

How much does a refinance cost?

This can be the biggest hurdle for many people when it comes to changing up their mortgage. I personally have mortgages with a few different companies and the local banks that keep their mortgages in-house. In my experience these types of loans have been much cheaper because they're not dealing with a bunch of different departments across the country or being forced to communicate with the government for each change. The last refinance I did with one of these companies it cost me right around $1,000. This is not the typical case and yours will most likely be more expensive. 

On the other hand I also hold a mortgage through Chase bank, which is a conventional home loan, that I originally put 3% down on through a mortgage company. From that point this loan was sold a total of 7 times, before finally settling at Chase bank, which I had no control over. This is a more typical case. So now for any refinances I am forced to go through them or pay off the loan and move it to another institution. 

I personally took advantage of the lower Mortgage Rates and refinanced an investment property toward the beginning of the year, and more recently started the refinance process on the Chase Bank loan. There are a large range of fees to expect:

  • Appraisal Fee $500 - This one is very important, because it's what tells you the current value of your property. This is the minimum amount you'll pay if you start the process and decide you don't want to finish.

  • Origination Fee $400 - Various admin fee.

  • Underwriter Fee $400 - Various admin fee.

  • Payoff Fee 3%, $3,000 - Fee to payoff old loan interest before starting new loan. I don't think all banks charge this fee, but it's definitely taking advantage of the individual. They're forcing people to payoff the loan in full including all interest and fees that come along with that even though the loan will be ongoing. 
As you see above it can become quite expensive to refinance your loan depending on the bank you work with. This is my personal experience with Chase before I decided that wasn't the way I wanted to go. The biggest thing you need to figure out is what are your goals with this refinance. Are you looking for a lower monthly payment, just a lower interest rate in general, shorter loan term. This is a question you have to ask yourself to figure out if it's worth it. 

On top of that, discussing these goals with your mortgage company is very important. My sole goal of the refinance was to lower my monthly paying and eliminate the PMI I'm currently paying which comes in at $107/m. After looking at all the figures my lender recommended doing a "reassessment". 

They'll send somebody out to my property for $150 to confirm the value of the home and determine if the value is high enough to drop the PMI. With the reassessment my loan has to be less than 75% of the value of the property to drop the PMI, unlike the typical 80% it takes. I decided to hold off on doing anything until I was able to payoff this loan further. 

Home Refinance Calculators

What happens during the refinance process? 

Starting the Process

It's not the easiest thing in the world to start the home refinance process. The first step is to fill out a ton of information about your finances, just like when you started the mortgage process the first time. They'll ask about any assets you currently hold and major liabilities. Monthly payments on those liabilities like a car loan, or credit card. They ask previous residency information, and how you plan on paying your current and future bills. This includes pay statements, W2s, the works. 

Running the Numbers

After getting all the paperwork out of the way you most likely signed a form authorizing them to run your credit. I never authorize anybody to run my credit during an automated process. I always wait until I can talk to a human being and confirm this is what I want to do at the time. Once this authorization happens they'll process your credit score and provide you with an interest rate they'll be comfortable lending against. Always fight that number. Never take anything at face value. Request they run through their process again and manually verify the numbers and give them a bit of reassurances that you qualify for the lower rate. In my situation I've never missed a payment in my life. I always use that to negotiate, but I'm the person they're least likely to ever have an issue with. 

Time to Work

After your information has been submitted and everything looks to be in order, they get to work verifying everything you've ever told them. They call other loan holders if necessary to make sure you're being truthful and start the process to confirm the value of your home to determine how much they can lend you.

At this point an Appraiser goes out to your property and does a quick once over. If you're looking to cash out on this new loan you need to make sure your home looks as clean and as stable as possible for this individual. Redo any exterior paint that looks faded, like faux shutters, front door, garage door trim. Clean up any leaves around the house and on top of the roof and trim back any trees that are resting on the roof or floating over it. Remove any lingering yard debris and clean up outdoor furniture. 

This is a great opportunity to make minor changes that could add thousands to your homes value, specifically because an appraisal at this point in the process is more of a "glance" than a market inspection.  

Monthly Payment

The mortgage company generally won't refinance your loan for the exact amount of years you currently have left. They usually give you a list of options like 30, 20, 15, and 10 years. If you originally had a 30 year home loan, which is typical, and now have 23 years left you need to make a tough decision. Do you shave off those 3 years and slightly increase your loan payment even with the lower interest rate, or do you extend the loan back to the original 30 years and start all over again? The years of payments you've submitted down the drain and the interest cycle now starts over meaning you're most likely paying less than a couple hundred dollars to the principal per month. 

For example, and you can follow along on Zillow if you would like. I don't like using their refinance calculator because honestly they're kind of confusing: 

Here's the original loan we currently hold. Got the house cheap at $110k with a minimal down payment. It's a 30 year loan with a 4.2% interest rate, and we're paying $750/m. At 8 years (96 months) we decide to refinance. We've currently paid $33k in interest and $17k to the principal. We refinance the remaining $89k looking for a lower rate to save money. First situation we'll look at is refinancing to a 30 year loan, because that's what we're used to and what most people do. 

As you can see in the picture above we've now refinanced into a respectable 2.8% interest rate. In this situation with the 30 year loan we've now extended our loan another 8 years meaning 38 total years financing your home. I've also added in 3% to the loan amount to account for the refinance. On the plus side our current payment is now $580/m. If a lower payment is your goal then this is perfect, but as you can see in the picture we'll be spending an extra $45k in interest due to a typical loan structure. We've already paid $33k on the original loan which is more than half the interest due for a total of $88k in interest. Now let's look at the same loan on a 15 year note: 

As you can see above, things are looking a little better in the money spent department. Moving into a 15 year loan opens you up for even better interest rates. This is an extremely aggressive loan strategy that I highly recommend right now. With a 2.4% rate over 15 years you only pay an additional $17k over the life of the new loan, but your payment on this new loan comes in around $810/m. That is only an extra $60/m, but I get it can be hard to stomach at times. 

This is the real power of a refinance during this time. I know it's tempting to go for that easy lower payment, but with this loan strategy you shave an additional 7 years off your loan and actually save another $17k in interest. That automatically takes care of all the refinancing fees and makes everything that more worth it. On top of that, if you have it paid out a little more your monthly payment might not even increase! For the same payment, you could shave 5-10 years off the life of your loan and thousands in interest. 

Closing on your new Loan

You've finally made it through the process and are ready to close on your new loan. A couple days out your lender should send you a bit of familiar paperwork including a rundown of the costs to finish out the loan and your new monthly payment. Make sure that new payment lines up with what you calculated and don't be too shocked by all the little charges they slipped in there. From here you'll go in to fill out your paperwork at the designated time or during this time, you might have the option to close on your home remotely. This is what I do with all of my loans. You're required to source a notary yourself and overnight all the paperwork, but it's a breeze especially if you're out of state. 

Can you Refinance a Home Equity Loan or HELOC into a Mortgage?

Yes, you absolutely can. Short and sweet. This doesn't actually have much to do with the home equity loan, however. The way to do this is to do a partial cash-out refinance where you refinance for a higher loan amount than you originally held. 

In the above example, instead of refinancing the $89k we had left on the loan you would request a new loan amount of let us say $102k. That would give you roughly $10k of cash in your pocket after closing costs and can put that directly toward paying off your $10k equity loan. 

This in turn will give you a slightly higher monthly payment on your loan but could eliminate hundreds of dollars in potential monthly payments going to the loan or line of credit which could mean your higher loan amount could actually save you money monthly. On the downside of this with a HELOC, this could potentially eliminate your line of credit due to the limited amount of equity left in your home after the refinance so be careful and do plenty of research on this subject. 

So, should you refinance your home right now?

Now that you've read through all your options above you can make an informed decision about what's best for you. Sometimes the best answer is to not doing anything during this time, and that's ok too. If your not going to gave money in the long term, reduce your monthly payment now, or reduce your loan term then no matter what the mortgage guru tells you it's not going to be a good idea. 

A lot of these banks are pushing for a refinance because they can add on all these fees. They're pushing for it because it's good for them, not for you. Make sure you're not getting the short end of the deal by having clear goals going into the process and sticking to those goals, not what the lender wants you to do. Keep educating on your options and Happy Spending everybody!



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