Millennial Series VII: Refinancing a Home: What You Should Know

Posted on Tue, Oct 10, 2017 ©2021 Drucker & Scaccetti

By: Matthew Walker, CPA

 

D&S Marketing_011.jpgHave you wondered when is the best time to refinance your home? There’s no simple answer to this question. Generally, if the prevailing rate is 1% better than your current rate, it’s worth it to refinance. But, of course, other factors must be considered. Today, we will look at some of the basic questions you should ask yourself and the lender before you refinance your mortgage.

 

The most important things to know when considering refinancing is what is the prevailing rate and how long do you plan on staying in the home before moving.

 

What Are Your Objectives

Like most major purchases, it comes down to knowing your objectives.  The time you plan on staying in your home will help you determine the type of loan to consider.  If you plan on being in your home for five years or less, consider options like a five-year adjustable rate mortgage, where you can lock in a lower rate for the first five years before you move.

 

Closing Costs

There are usually closing costs and fees related to refinancing.  If you will incur significant closing costs, and you plan on moving soon, it is probably not beneficial to refinance.   You can determine this by looking at the projected reduction in your monthly mortgage payment after the refinancing and multiplying it by the number of months you plan on remaining in your home.  If the monthly savings are less than the closing costs and fees, it’s unlikely you will benefit from refinancing.

 

Repayment Period

While you may increase your monthly cash flow, you can lose equity if you start over with a new 30-year mortgage. Depending on your situation, a lesser repayment period (20 or 15 years) may be more beneficial. 

 

Key Questions to Ask a Lender

 

  • What fees/closing costs are associated with my refinance and how much will I save per month? Balance these numbers carefully. The time it takes for your savings to pay off the fees and closing costs is a critical indicator of whether you should proceed with your refinancing plans.

 

  • Please explain every aspect of the Good Faith Estimate (GFE)? Many first-time refinancers are surprised to find their APR increase because of all the fees lumped into this estimate, but this number provides a more accurate assessment of the long-term cost of your mortgage. Once a good faith estimate is issued, the lender/broker cannot change the fees in the origination box.

 

  • What will I need to provide? Different lenders may require different documents, but you should plan on having your last two years of tax returns, W2s, real estate tax bills, proof of homeowner’s insurance and, if you own a business, any applicable business tax information.

 

  • What factors do you consider when making refinancing loan decisions? Credit score is one of the single biggest determining factors in the refinancing equation. Your debt-to income ratio also plays a major role in your ability to get approved for a home refinancing loan. Along these same lines, the value of the refinancing loan usually must be 80% or below the value of your house. Consider asking a realtor to provide you comparable sales for homes like yours in your area to determine the approximately fair market value of your home to ensure you will fall within the 80% margin.

 

Get Advice

As with any major financial decision, it’s important to weigh all the available information and options before proceeding. This includes talking with your financial and tax advisors about the decision to ensure it is aligned with your long-term strategic goals.

 

Many statistics confirm millennials are not buying homes at the pace and rate of previous generations. But, for those who own a home, current interest rates may offer an opportunity to refinance, save money or pay off your mortgage sooner than expected. Use this blog as a base-level guide to help you through the process.

Topics: real estate, Taxes, Millennials, homeowner, buy vs. rent, refinance, interest rate, closing costs, house hunting

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