If you’re paying too much for your home and are thinking about refinancing your mortgage, most people will recommend talking to an expert. But who has time for that?!
We know you’re busy, so that’s why we reached out to mortgage refinancing experts ourselves to see what they have to say.
Our question was simple: What is one piece of advice you would give to someone considering a mortgage refinance?
We had several dozen loan officers, financial advisors, real estate agent and wealth planners respond. Most of them had great advice, so we compiled their answers here.
If you’re looking for expert advice on refinancing, here it is. All in one place!
Check Your Credit & Equity
Before you even go down the road to refinancing, you have a little homework to do yourself.
Kimberly Porter, CEO of Microcredit Summit encourages homeowners, “You will first want to check your credit report to see your debt-to-income ratio and credit score, as these are big factors in determining eligibility and interest rates.”
Once you understand where your current credit score stands then, you will want to determine how much equity you have in your home.
Porter continues, “You can check sites like Zillow to see what the estimated value of your home is and compare that value to your outstanding mortgage. Homes with at least 20% equity are generally easier to get refinanced.”
Finally, Porter adds, “Then you need to look into the costs associated with refinancing as well as other fees that could come into the picture or go away, like Private Mortgage Insurance.”
By understanding where you stand financially before you look into applying for any refinancing options, you will save yourself time and money.
Evaluate Different Loan Options
There are many different types of refinancing offers. That’s why Alex Caswell, a wealth planner at RHS Financial, urges borrowers to “carefully evaluate your options between an adjustable rate, a 15-year fixed mortgage, and a 30-year fixed mortgage.”
“An adjustable-rate mortgage will always look appealing but if interest rates go up after the 5-year period you may need to refinance once more,” Caswell says.
In regards to the length of your mortgage, Caswell has more expert advice. “A 15-year mortgage will have a lower interest rate than a 30-year mortgage but will force you to "save" or pay down the mortgage faster than necessary. A 30-year mortgage will give you the greatest flexibility out of all three options. You will have a fixed rate that you can refinance down if interest rates decrease in the future.”
Consider All Closing Costs
Probably the most common answer we heard was that borrowers should carefully examine the costs of mortgage refinancing.
Thanasi Panagiotakopoulos, Principal of LifeManaged, agrees with Caswells advice about carefully considering different loan terms. He also suggests that borrowers need to fully understand the additional costs of mortgage refinancing. “To properly assess if a refinance is right for you, be sure to ask the loan originator or mortgage banker to send you your loan estimate and closing disclosure forms,” Panagiotakopoulos says. “This will allow you to understand all of the costs incurred by you to get that sought after lower rate. If you are going to save .25% on your loan, but the loan has big origination, loan processing fees and title charges, you might be better off keeping the higher rate loan if you know you plan to sell in the next couple of years.”
Panagiotakopoulos suggests calculating a break-even point to determine if the refi is worth it. “The simplest way to do this is to add all of the costs of the refinance together, and then look at the principal and interest savings of the proposed loan to analyze the number of months you must stay in your home just to break-even.”
Timothy E Hansen, CEO of Wealth Growth Wisdom, LLC, echoes these sentiments, but he also mentions additional factors that you should consider. “Low mortgage rates are a great reason to consider refinancing. However, this alone is not enough to determine your decision to refinance. Other factors like current interest rate, refinance cost, credit score, and home equity should be properly considered before taking any action.” Hansen recommends that you speak with a financial advisor to help guide you to the right decision.
Look for Zero-Closing Cost Loans
Dan Green, a licensed mortgage loan officer with 17 years in mortgage lending experience and founder of Homebuyer.ai, has additional advice when it comes to closing costs. "A refinance is a gamble that mortgage rates won't go lower tomorrow, and for the last decade, mortgage rates have dropped. Limit your refinance risk by doing zero-closing cost loans, and chase mortgage rates lower as often as reasonable."
Consider Lifetime Interest
Most of the experts that we spoke to discussed a lower interest rate and a lower monthly payment, but very few mentioned the total amount of interest you’ll pay over the full course of the loan.
Matthew Yu, Vice President of Socotra Capital, says that “if you are refinancing to lower your monthly payments, keep in mind that in the long run if you ONLY make minimum payments you will end up paying MORE money for the interest.” Yu continues, “For example, if you’re 15 years into your 30-year mortgage and decide that you want to lower your payment, you would do a refinance. However, because you’re likely going into another 30-year loan, you will be making a total of 45 years of interest payments before you own your house.”
Fully Understand Cash-Out Refinance
A cash-out refinance might seem like a great option if you are looking for a way to get some quick cash, but be aware of the downsides. If it seems too good to be true, it probably is.
Caleb Liu, Owner of Simply Sold, adds, “Cash-out refinances do not give you free money. After the draw period expires, you transition into the repayment period which includes both interest and principal payback.”
“Whether you spend the cash on a new car, a major home improvement project, or chasing higher investment returns, remember that the bill will come due at some point,” Lui continues.
Calculate Your Break Even Point
While many experts recommend calculating your break even point, Eric Jeanette of Dream Home Financing and FHA Lenders puts a concrete timeline on the matter. “If the refinance is to get a lower rate with the same term, then a good rule of thumb is the resulting lower payments should offset the refinance costs within two years at the most.”
Jeanette also has additional suggestions on what to do with those savings. “The smart move would be to take those monthly savings and continue to use those funds to pay down your balance.”
Take a Look at Your Complete Financial Situation
One of the more unique tips that we received was from Leslie Shull, an adjunct professor of business & real estate finance at Sacramento City College and founder for Let's all Flourish. She is one of the few contributors that said that a lower interest rate is not always the most important thing.
“The main thing someone has to look at when refinancing is very simple, does it improve their financial situation? For instance, in the case of debt consolidation, there are times when an increase in interest rate may make sense because the homeowner is consolidating much higher interest credit cards and the blended rate is much higher than the new mortgage interest rate. The same would be true for eliminating mortgage insurance.” Shull continued by stating that “a solid, reputable mortgage officer with their client's best interests at heart will run the blended rates for their clients and make sure it all makes sense.”
Another common message from refinancing experts is to gather quotes from additional lenders. Jaquetta T. Ragland of YoungandFinance.com says that “most individuals go with the first offer they receive, but if you shop around, you may be able to find a better interest rate and pay no fees to refinance.”
When shopping around, it is important to factor in the other pieces of advice outlined above. Don’t just hunt for the lowest interest rate, also evaluate different loan terms and consider closing costs.
Mark Ritenour, Loan Originator at State Wide Loan, also adds more about the importance of shopping around and finding a good broker. Ritenour shares, “usually the ultimate professional, knows exactly what they are doing, can close a clean deal in 2 weeks or less, and will never drop the ball.
“Testimonials, yelp, google reviews are great for finding those guys, look at a number of reviews not just the score of course. I wouldn't recommend referrals unless you really trust the person, I've seen too many people who just refer their best friend because they're close, not because they're any good. Or worse, they refer some shady person because they were promised a finders fee,” Ritenour continues.
Talk to Someone Local
While you might not be able to talk to someone in person, you can always call a local agent with knowledge in your specific zipcode.
Melinda Hipp, Branch Manager at Open Mortgage, says, “DO NOT respond to mailers offering you the refinance deal of a lifetime with no closing costs or out of pocket, read the small print that no one ever reads!”
Hipp continues, “These offers are very tempting, but go back to the person/company that provided your loan in the first place. Get a real live local person on the phone or on virtual teleconference and work the numbers. They should be finding out how long you will stay in the home, what is your reason for refinancing (not just because the neighbors all did it) and look at both your break even costs to refinance the loan and also how much you will save over the LIFE of the loan.”
While the mortgage refinancing process might sound complicated, some experts recommend that you don’t hesitate once you’ve identified significant savings.
Alan Rosenbaum, CEO of GuardHill Financial, says that “a consumer should refinance as soon as there is a meaningful savings rather than waiting for rates to possibly drop further.”
This is an interesting perspective, but it makes sense. You can always refinance again if interest rates continue to decline.
If you are thinking about refinancing your mortgage, don’t be intimidated by big numbers, fancy lingo, and complicated contracts. Take the advice of the mortgage refinancing experts:
- Evaluate different loan options.
- Consider all closing costs (or look for a zero closing cost loan).
- Consider how much interest you’ll pay over the full lifetime of the loan.
- Calculate your break even point.
- Factor in your blended interest rate.
- Shop around.
- Don’t wait for rates to drop even more.
We hope this helps guide your decisions. If you want to learn more, read our complete guide to mortgage refinancing.