I see the question all the time, “I received refinance fliers in the mail. Should I refinance?” or “Rates are at an all time low, should I refinance?”.
It is true that rates are at a very low point, so for some it may make sense to refinance if they have a higher rate. Still, owning Real Estate is public record and a very lucrative market. So companies are indiscriminately sending out fliers no matter the person rate. We have even seen fliers HIGHER than our current rates. Lesson learned that just because you have received a flier does not mean that it makes sense for your situation personally. Therefore, it’s up to you to figure out if it makes sense or not!
How to Figure Out if You Should Refinance Your House:
As we discussed, it really depends on your specific situation, break even, and long term savings if refinancing makes sense. We own eight houses as rentals, and we have done two cash out refinances . So for us it did make sense. The thing to keep in mind is the old saying, “There is no such thing as a free lunch.” This is VERY true in the mortgage.
The first thing is to evaluate your situation. Here are some questions to think about when you are evaluating
What is your current interest rate?
The first thing is to look at is what your current interest rate is. Mortgage companies are sending out notices indiscriminately so its important to know your rate.
What is your cost?
There is no such thing as a free lunch. Refinances are big business, that is why the companies spend so much money sending the flier out. Therefore, it is important to see how the cost will be paid. Some places give low rates and have high fees. Other mortgage companies have higher rates but cover the entire fees. So make sure you know exactly how you are paying for the costs and the actual number.
Do you have enough equity?
There are some situations, such as streamlined VA loan, that require no equity if your house is a personal property. On the other hand, if your house is a rental most of the times you are required to have 20-25% in the home to refinance. So depending on how much you have in your house, you may or may not be able to refinance your house.
How long have you had a house?
A refinance causes you to restart the loan all over again. Since you prepay all of your interest in the beginning of the loan, you are going to be repaying more interest when you start again. So not only does it matter how long you will be staying in the house, it also matters how far you are in the loan payment.
How long do you plan on owning in the home?
Since refinances are expensive, it is important to think about how long you will be in the house.
Do you have a prepayment penalty?
The only prepayment I have seen recently has been in regards to new loans. Most new loans I have seen have a requirement of 6-7 months due to their mortgage brokers being penalized if the mortgages are sold within this time period. As always it is important to check your contract.
What is your break even point?
Once you know the cost divide that by 12 months. That is how long it will take for you to break even. How does that compare to the amount of time you plan on owning in the home? I personally like to break even in 1 to 2 years. Things after that get complicated in my mind.
Remember you can also take a higher interest rate to have a lower cost. The cost is the higher rate. While this is loss of expense over time, for shorter times it is a great option so you get some savings without the cost.
Are you willing to put into the effort to put in the effort to do paperwork?
Most refinances are a ton of paperwork along the lines of a mortgages. You have to resubmit all your paystubs, bank statement, etc. So doing a refinance is not for the faint of heart. Make sure it makes sense for you to complete one.
Where to look for mortgage brokers?
Once you figure out that it does make sense, the key with refinances is to shop around. Normally, unlike trying to buy a house, this is a low stress situation, so going with a low cost broker is a good thing and not a negative. A refinance is all about getting the best deal.
Quicken – They are low cost and from what I have been told they are very easy to work with paperwork wise. My friends love them because mostly everything can be done online and it is VERY simple. Many people find that they have the best rates. The biggest issue is that they are large and therefore not very personal. They also don’t tend to be complicated for those just beginning well.
USAA/Navy Fed– These are both big banks that specialize in VA loans. Over the years I have heard both of these banks offering unbeatable deals due to their experience in the market.
Big Banks (Wellsfargo, Citi, etc) – These are great options as their fees and costs tend to be lower. In my personal experience, they have very tight regulations. When we were looking to get financing for our 5th house, they wouldn’t lend to us, but they would buy our mortgage from other houses.
Local Brokers – They tend to be more expensive but they can do the difficult work. They are my favorite and who I use for my typical mortgages. We have had MANY issues over the years and none of it has stopped the deal from going through.
Things to look at when you are shopping around
Look at all the details when you are shopping around. This is already the second mortgage and mortgages are expensive. In addition, you are restarting your years every time unless you choose a lower number of mortgages. So make sure that you are picking the right mortgage product for your situation.
Choosing Your Mortgage Product
There are multiple products such as a cash out refinance, streamline, etc. So make sure you are choosing the best one for yourself long term.
Cash Out Refinance- These are great if you have significant equity and plan on reinvesting the money. We did these on two of our houses in Charleston. It was the reason we were able to buy #7.
Word to the Wise- Do not refinance your house to pay for consumer goods. One of the reason people got themselves in trouble during the recession was due to taking money out of their house and putting it towards consumer goods.
Streamline VA loan– These are great if you want to lower your rate. They tend to wrap up all the fees in the rate.
VA to Conventional– It is great to be able to use your VA loan again on another house. Unfortunately, conventional tends to require 15-25% down so your house usually must have equity in it for this to be an option.
etc etc etc- These are just a few of the more popular options. There are a ton more programs out there. Therefore, it is really important to shop around and see what programs are out there that fit your situation.
It is REALLY important that you check with your mortgage broker about your specific circumstances. As someone who has bought eight houses by age 28, I can tell you that there are many nuances. It truly is “devil in the details,” so finding a great person to navigate you through everything is important.
What has been your experience with mortgage refinance? Are you glad you did it? Wish you didn’t?0