Mortgage Refinancing Explained
Refinancing your mortgage can be a great way to improve your financial situation and help accelerate meeting your financial goals. So why don’t more people do it? There are a lot of misconceptions around refinancing a mortgage. We want to help dispel those misconceptions and show you how refinancing your mortgage can be an important part of your financial plan.
What is a Mortgage Refinance?
A mortgage refinancing means taking out a new mortgage loan to replace the current one. The terms of the new mortgage can be customized to fit your needs. You can refinance to a new interest rate, a new length, or amount borrowed.
Why Refinance Your Mortgage?
A mortgage refinance can reduce your monthly mortgage payment, give you to access cash for things like home improvements or paying off credit card debt, and can cancel PMI (private mortgage insurance). Refinancing your mortgage can save you money.
Mortgage Refinance Misconceptions
There are some common myths around mortgage refinancing. Let’s do some myth-busting.
How Low Can They Go?
Mortgage interest rates are at near historic lows. We all want a good deal and sometimes that makes us afraid to pull the trigger on a mortgage refinance. What if you refinance now and a month or two later, interest rates go even lower?
You can’t time the market when it comes to investing and the same is true of refinancing your mortgage. Rather than watching interest rates like a hawk waiting for the perfect moment, look at your current mortgage statement instead. Better yet, let your CERTIFIED FINANCIAL PLANNER™ look at it. Your CFP® can help you identify whether refinancing is a good option for you based on your total financial plan, not just interest rates.
Can we lower your interest rate, is now a good time to pull out cash for other expenses? Do you have student loan or credit card debt that’s holding back progress on your financial goals that a refinance could alleviate?
The answer may be Yes, No, or Not right now. Refinancing your mortgage is something that should be considered every few years; regardless of whether you plan to stay in that home. It doesn’t matter if you bought it a few years ago or a few decades ago. Refinancing your mortgage is always an option when it fits into the financial plan that your CFP® has created with you.
Refinancing Your Mortgage is a Huge Hassle
If you’ve recently gone through the home buying process, you might still be slightly traumatized. It can be aggravating and time-consuming; so it’s understandable that you don’t care to repeat the experience by refinancing your mortgage.
If you bought your home just a decade ago, you’ll be amazed at how streamlined the mortgage process has become in that time.
But refinancing your mortgage is not as difficult or time intensive as you might fear. Many lenders handle the process entirely or almost entirely online; which simplifies things and moves the process along quickly.
If you spend just 15 to 30 minutes gathering the appropriate documents, you’ll likely have everything the loan officer and underwriter needs. In most cases, we can access all our financial records and documents online; so they’re easy to come by and you can have them instantly.
There are some required disclosures, but depending on the loan type, you may not have to provide that documentation and the lender can often do third party documenting of your income and assets. There are some properties that qualify for a property inspection waiver meaning you won’t have to have a full appraisal in order to refinance your mortgage. The value of your home can be derived from the market and sales in your neighborhood.
What’s the time frame for refinancing your mortgage? If you have all your ducks in a row before beginning the process, you can expect the process to take 30 to 45 days. Sometimes it can happen faster than that.
Out of Sight is Out of Mind
Many first-time homeowners didn’t put down the recommended 20% down payment needed to avoid paying PMI, which we briefly mentioned above. Maybe those buyers only put down 3%, 4%, or 5%. They were happy to be able to buy a house and assumed PMI as part of the deal.
But PMI does nothing for a homeowner. It’s an expense you pay that is entirely meant to protect the lender in case you default. You get no benefit from it at all but you’re paying it every month. PMI is what we like to call a stealth cost or a hidden cost. It’s disclosed to home-buyers at the time of purchase but because it’s just rolled into your mortgage payment, you forget about it eventually. A stealth cost, out of sight and out of mind.
This is another instance where going over your mortgage statement with your CFP® can be very beneficial. There it is, that PMI you’re paying every month. A part of refinancing your mortgage may be the option to eliminate that PMI expense from your mortgage payment every month.
Now is a good opportunity. Home values have increased and if you can get to that 80% loan to value of your current property value, that PMI cost can be eliminated. If you bought your home less than five years ago for less than 20% down, refinancing your mortgage now can be a great money-saving opportunity.
Is Refinancing Your Mortgage Right for You?
Home values are high and interest rates are low. The question of if refinancing your mortgage is right for you might seem obvious. However, financial questions are rarely as straight-forward as that.
Refinancing your mortgage does not happen in a vacuum. It will impact other areas of your carefully crafted financial plan. You want to make sure that the impact is a positive one. Together you and your CFP® can decide if refinancing your mortgage fits into that plan now.
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