The Federal Reserve continues to maintain historically low mortgage rates, which is a boon for buyers. These low rates are also highly beneficial for homeowners looking to refinance existing mortgages. Whether or not a homeowner should refinance a mortgage, however, depends on what he or she intends to do with the home immediately following a mortgage refinance.
Real estate professionals need to be equipped to address questions regarding this topic as they arise with current and potential clients. While homeowners may be partially informed on the impact of mortgage refinancing, many may not have a complete picture of what mortgage refinancing is, or how refinancing a home can impact both short and long-term plans to sell. Currently, first-timers make up approximately 33% of all home buyers, so it is likely they have little to no experience in the refinance space. Encourage clients who may be considering this option to critically think about how long they plan to stay in the home as well as other key questions.
Questions homeowners forget to ask about mortgage refinancing
The average U.S. FICO score, which measures consumer credit risk, has improved for the past several years, hitting 709 in September 2019. That combined with lower fixed mortgage rates, which have remained under 5% for the past few years, put many people in a better place to refinance.
Most homeowners know to ask a few broadly understood questions. There are also several important factors about mortgage refinancing many homeowners either forget or don’t know to ask. Importantly, homeowners whose property is currently listed for sale, or who may sell soon after refinancing, could take an unnecessary financial hit by refinancing.
Homeowners should understand a few key points related to how refinancing can impact the sale of a home, including:
The breakeven point
The impact of selling a home with a refinanced mortgage
The increased payoff time
The increased loan cost
How long after you refinance should you wait to sell your home?
There is no limit to how quickly a homeowner can sell a home following a mortgage refinance. However, closing costs may cause some homeowners to ultimately pay more if the home is sold before the breakeven point. With the average closing costs ranging from 3% to 6% of the total loan value, some homeowners may see closing costs that decrease the value of refinancing.
Agents should help inform homeowners of this potential financial impact if the home to be refinanced is currently for sale, or if the homeowner plans to sell soon after refinancing.
If a homeowner is determined to sell the home in the near-term, it may be prudent to recommend the homeowner wait until after the closing costs have been fully recouped.
Agents should also make sure homeowners are fully aware of the total cost associated with refinancing the home. Many homeowners may assume that lower monthly payments mean lower payments overall, without taking into account the newly-extended payment period.
The 30-year mortgage is still the most popular term, and some homeowners who’ve already been locked into a 30-year fixed mortgage may be tempted to refinance into another 30-year fixed due to lower monthly payments. Instead, agents may want to educate homeowners toward a 15 year fixed rate mortgage if the homeowner plans to stay in the home for a longer period.
Common questions homeowners ask about mortgage refinancing
For homeowners seriously considering a refinance, there are some common questions they’re likely to think about and may potentailly ask you, before you even go to the bank, including:
Do I have to refinance with my current lender?
Do I qualify for refinancing?
Is my credit good enough to refinance?
Will refinancing lower my credit score?
Do I have to make payments to my original lender after a mortgage refinance?
It’s particularly important to help homeowners understand that they can refinance their home mortgage with any lender. Homeowners should also understand the impact a credit score will have on the application process.
Although highly technical, it may be helpful to work with an agent to walk through some common calculations to determine whether a home qualifies for a loan. This discussion can include the fact that a loan-to-value ratio of 80% or less makes it more likely a loan will be approved.
Additionally, agents may need to be clear that a mortgage refinance is a new loan application. Some homeowners may not realize a new loan application is part of the process, even when refinancing with the same lender. Along the same lines, it’s important to understand that refinancing can cause a short-term hit to their credit score and may add years to their loan payment. Particularly if taking a 30-year loan term.
As noted by Experian, many homeowners also remain unsure of which lender to pay immediately following a mortgage refinance. It’s critical that homeowners understand that they must continue to pay their original mortgage lender until their refinance is approved and the new lender has fully paid off the old mortgage.
Finally, lenders should arm homeowners with the information necessary to avoid negative impacts to their credit score. Agents may want to provide homeowners with contact information for the individual within an organization who are handling the case, and an expected timeline for when to check back on the status of the new loan.
Also, make sure homeowners know to verify the mortgage refinance status through their credit report. An updated credit report should show that the old loan has been paid off, while the new loan should be noted on the report.
Whether your client plans to sell their home in the near future or not, it is important to properly time a home refinance to work with the short and long-term plans for the home.