Refinance Basics and Strategy

by Tom Tousignant

in Blog, Mortgages, Refinancing

As mortgage rates have fallen (and risen) in the past few months, there are a lot of homeowners considering refinancing their home. If you are one of those people, don’t just lock it in and close it. It’s all about timing. If you lock a rate out of emotion or fear (which most loan officers force you to do), you’ll end up paying more than you should.

If you have patience and work with someone that will watch rates for you, you can lock in when rates swing lower. These rate dips normally lasts for a couple of hours, but if your lender is watching things closely, they can lock you in, based on targets that you agree on ahead of time.

Basic Refinance Questions

Lots of people have asked me what ‘refinancing’ actually is. It’s not a silly question, it’s not like you learn this stuff in school! So, here’s my ‘Refinancing basics′ blog post. Of course, if you have questions — feel free to contact me (tom@piedmont-mortgage.com).

In general, a mortgage is a contract between a bank and borrower, defining the terms by which a home loan must be repaid.

The paperwork, signed by both parties, includes agreements for things such as:

  • The interest rate
  • The length of the loan
  • The amount of money to be borrowed

But, like all loans, a mortgage loan can be paid off at any time. So, when market interest rates fall, homeowners will often exercise their right to an “early payoff” by securing a new loan that pays off the old one. (prepayment penalties can complicate things – if you have one or aren’t sure, I can review your original paperwork and help you strategize a way around that).

This process is most commonly known as a refinance.

What Is It?

A refinance is the changing of the loan terms against a property, often for a better interest rate or a lower monthly payment. When the refinance process is complete, the original lender’s loan is paid in full using the money from the new lender’s loan and the former’s relationship is officially terminated.

There’s no rule against how many times a person can refinance, nor are there any rules of thumb to determine whether or not a refinance makes sense. In general, if you can reduce your total financing costs over time, refinancing is a sound financial decision.

What if you just purchased or refinanced your home? The money you spent on your existing loan closing can’t be recovered – Points, Origiantion Fees, etc were all related to the previous loan. When you refinance, you get a brand new loan, so most of the costs will will have to recur. However, if the new loan and closing costs save you money over time compaered to your existing loan, there is no reason to stick with a more expensive loan just because you already paid for it.

Besides a lower monthly payment, there are other reasons to consider refinancing, including:

Convert from an ARM (or Adjustable Rate Mortgage) into a fixed rate mortgage (or vice versa)

  • To extract equity for paying off third-party debts or for cash
  • To extend a loan from 15 years to 30 year for payment relief
  • To shorten the term of the loan from 30 years to 15 or 20

When you refinance, there are a couple of other things to be aware of:

  • You will get a refund of your currrent escrow account after your existing lender is paid off. Your lender has 30 days to mail you a check for your escrow balance.
  • You always skip one or two mortgage payments when you refinance. Often, the skipped payment can cover all the closing costs. When your current loan is paid off, the payoff balance will include the interest since your last payment (so the payoff is higher than the balance). At closing, you prepay the interest from the funding date to the end of the month, so no payment if due on the 1st of the next month. If your new mortgage funds before the 15th of the month, you can skip your last payment to your existing lender, and the prepaid interest means you skip the next payment, so you end up skipping two payments if you close early in the month.
  • You still pay interest every day you have a mortgage, but the way interest is paid on the old loan and the new loan allows you to skip 1-2 payments. It’s really an accounting trick, however, not free money.
  • Your existing lender has no special offers for you, just a good marketing idea. On your mortgage statement, there is always a toll-free number to call to refinance. When you do this, you will usually get a college intern that is trained to a) keep you in your same loan at the current higher rate or b) keep you with them although you refinance into a new loan. Your existing lender only has one option for you – theirs. An independant mortgage banker (like myself) can compare more than one lender’s rates, so if your current lender doesn’t have the lowest rate, an independent mortgage banker can find you a new lender who really wants your business. realize that if you work directly with a bank, your loan officer is employed by the bank, so he can’t represent you. An independent loan officer can represent you.

Don’t Rush It. Work With Someone That Has YOUR Best Interests In Mind. I like to say that the lowest interest rate we offer is your best interest.

Make sure you’re waiting until a ‘bottom’ for mortgage rates. Make sure your loan officer can help you set a target interest rate that is realistic. Be ready to move quickly by having a completed application on file and credit report run. Then wait for the call that we love to make – it’s time!

Trust me, it will not be a large window of time, work with someone that knows what they’re doing. There are some extremely talented mortgage professionals in town. If they are not certified, ask them why, or find someone who is – shouldn’t the person trying to help you acquire the largest debt you likely have, care enough to get an advanced certification?

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