Have you decided that the market conditions may be right to refinance your mortgage in 2022?
If this is your first time looking for an after-purchase loan, it might seem like an overwhelming task. After all, the process is different from purchasing a home, and there’s not a real estate agent or home seller there to press on you on the timeline. This one is all on you.
But don’t fret. Team Clark is here to help you along the way. We have an ever-growing catalog of mortgage content that can help you make the right choices. In this article, I’ll try to break down the complicated task of refinancing your mortgage into easy, digestible steps.
Before you get started on your refinance, you should do the math on your current mortgage, personal financial status and market conditions to make sure that refinancing is warranted.
This is a small but important step in your prep work for a potential refinance.
Beverly Harzog, a consumer finance analyst and credit card expert for U.S. News & World Report, says:
“The lowest interest rates are given to people who have at least a 760 FICO score. You can save thousands of dollars over the life of your mortgage when you have excellent credit.”
If your credit score is below 760 and you have time to improve it, you may want to wait until you can clear that threshold before applying for your new loan. It may be worth the wait.
“Refinance” is a buzzword that is popular when interest rates are low, but is it actually something you have a valid reason for doing?
Here are some popular reasons that homeowners choose to pursue a mortgage refinance:
Once you have determined your “why” on the refinance, if you want to proceed, here are the steps for hunting down a new mortgage.
Just as you probably wouldn’t buy the first car you see on the lot, you also shouldn’t jump at the first home loan offer you see on the internet.
Refinancing your house is a huge long-term financial decision. Taking the time to do some homework can save you thousands of dollars.
Money expert Clark Howard says that you should avoid big banks when searching for quotes on a new mortgage. Typically speaking, they don’t offer the best rates, they have slower turnaround times on refinances and they’re notorious for trying to tack on frivolous fees. Clark believes you’re better off avoiding that potential headache.
Instead, Clark wants you to check with a mortgage broker and your local credit unions to get multiple quotes.
“You’ll want at least four choices,” Clark says. “If you’re happy with them, go to the place where you took out your original loan. Then go to the place where you normally do your banking business, go to a mortgage broker and then to a credit union. “And really, you can go much further than those four if you’d like. Because after you have those, you can go to online lenders. You can shop on your phone, you can shop on your laptop and you look at places like Rocket Mortgage.”
Once you’ve narrowed your list of potential lenders, it’s time to see what each has to offer.
Clark wants you to get the lowest rate possible, but he also wants you to avoid unnecessary fees. That includes exorbitant closing costs, which could set you back on your balance owed if they get rolled into the loan. For that reason, he says some people may be best suited for a no closing cost loan.
He also wants you to make sure that refinancing helps you move your payoff date forward — not backward.
“One of my favorite kinds of refinancing is going from a 30-year loan to a 15-year loan. If you have more than 23 years left on a 30-year mortgage and you refi into a new 30-year loan, you’ll extend the time you’re in debt,” Clark says. “But if you choose a 15-year loan instead, you’ll cut your interest rate even more and pay off the mortgage sooner.”
Remember to go through this process with multiple lenders. You’ll want a clear picture of the pros and cons of each type of loan they offer so that you can choose which is best for you.
When it comes to evaluating quotes, you’ll also want to make sure you’re doing an apples-to-apples comparison. Don’t compare a rate with no points to a rate with a point required, for example.
You may be asked to give permission for a hard pull on your credit during the quote process. It depends on the policies of the lenders with which you’re working.
I spoke with representatives from two credit unions, and they both said their organizations request hard credit pulls during the quote process.
LendingTree is a free online quote service that shops your information around to many lenders. Its website says its initial inquiry on your credit does not impact your score. However, the site also says that partner lenders who get your information through LendingTree may do their own credit checks:
“LendingTree pulls your credit report when you complete a loan request. LendingTree’s inquiry does not count towards your credit score nor does it show up on your credit report to anyone but you.
“Each Lender has their own policy about pulling your credit. Some may pull your credit before they make you a loan offer; others may pull your credit after you have accepted their offer. In all cases, LendingTree pulls your credit report when you complete a loan request.”
Once your credit information has been pulled, the clock starts ticking. You will have a period of up to 30 days (depending on the scoring service) during which multiple lenders can do credit checks without any adverse impact on your credit score. This lets you shop around without doing further damage to your credit rating.
Clark advises gathering all of your quotes within 14 days of the date you requested your first quote. Later in this article, I’ll talk more about why Clark considers that two-week deadline to be so important.
Now that you have a few refinance quotes, you are ready to use Clark’s mortgage refinance calculator to see if this transaction is a good idea.
But, first, you should familiarize yourself with Clark’s breakeven rule: It’s the foundation on which the calculator is built.
Clark has a special rule he likes people to use when they are considering whether a refinance is worth the costs associated with it.
While Team Clark has a more in-depth breakdown of this philosophy here, the quick pitch on it is this: Clark wants you to break even on your refinancing costs (closing costs, points, etc.) within 30 months in interest savings alone.
“If you can make back the cost of the refinance in 30 months or less, you should do it,” Clark says. “It just makes financial sense. That’s the trigger.”
It’s important to note that Clark is talking about making the closing costs back in 30 months solely through interest savings, not payment savings. Interest savings is a true measure of cost recuperation. It could look like you’re saving money if your monthly payment goes down because of a longer loan term. But in long run, that does not save you money.
Clark’s mortgage refinance calculator not only gives you the financial specifics of a transaction, but it also gives you tangible and actionable advice based on the breakeven rule we just discussed.
You can plug your information in here for guidance:
Your monthly payment will go up down {{ calc_change_in_paymentDisplay }} {{ calc_change_in_paymentDisplay }} per month.
Your payment is going up because you shortened your payoff from {{api_hom02_currentTermO/12}} years to {{api_hom02_traditionalTerm/12}} years.
Your new monthly payment will be {{ api_hom03_pandi_run2Display }}. This amount does not include insurance and taxes.
Your new mortgage will be paid off in {{ calc_refi_payoff_year }} instead of {{ calc_current_payoff_year }}. You have added {{calc_change_in_payoff_yearsDisplay}} years to subtracted {{calc_change_in_payoff_yearsDisplay}} years from your loan period.
If you refinance, you will save {{ calc_change_in_total_interest_costsDisplay }} in interest over the life of the loan compared to what you will pay in interest if you do not refinance.
If you refinance, you will pay {{ calc_change_in_total_interest_costsDisplay }} more in interest over the life of the loan compared to what you will pay in interest if you do not refinance.
Clark’s simple rule:
“If you can make back the cost of the refinance in 30 months or less, you should do it.” - learn more about this rule.
Your new mortgage will pay for the {{calc_total_cost_of_refinancingDisplay}} cost of refinancing in {{ clark_calc_interest_breakeven_months }} months.
If you refinance your mortgage, you will never save enough interest to pay for the {{calc_total_cost_of_refinancingDisplay}} cost of refinancing. Refinancing your mortgage is probably not a good idea.
Based on Clark’s rule of thumb, doing a refinance is probably a good idea as long as you plan to stay in your home for more than {{ clark_calc_interest_breakeven_months }} months.
Based on Clark’s rule of thumb, your payback period is longer than he normally recommends. For this refinance to make sense for you, you will need to be sure you are going to own your house longer than the {{ clark_calc_interest_breakeven_years }} years it will take to pay for the cost of the refinance.
Even though you will be able to pay for the cost of refinancing in less than 30 months, you will actually be paying more in total interest over the life of the loan. What this means is that this refinance is a good idea in the short term, but in the long term it will cost you more money. You should consider refinancing into a loan with a shorter term. This will give you the benefit of lower interest costs in the short term and the long term.
Not only is the breakeven period longer than Clark recommends, but this refinance will also cost you more in interest over the life of the loan. If you think you will be in your home long enough to pay for the cost of refinancing, and you want to also save money over the life of the loan, you should consider a loan with a shorter loan period.
In your first payment, you will be saving {{calc_change_in_first_interest_paymentDisplay}} in interest costs.
Period | Beginning Balance | Principal | Interest | Payment | Ending Balance |
---|---|---|---|---|---|
{{row.period}} | ${{row.beginningBalance}} | ${{row.principal}} | ${{row.interest}} | ${{row.payment}} | ${{row.endingBalance}} |
Your current mortgage is scheduled to be paid off in {{ calc_current_payoff_year }}, and your new mortgage is scheduled to be paid off in {{ calc_refi_payoff_year }}.
If you pay {{calc_additionalal_principalDisplay}} in additional principal payments each month, you can pay off your new mortgage in {{ calc_current_payoff_year }}, just like your current mortgage.
Paying this extra amount will save you {{ calc_enhanced_change_in_total_interest_costsDisplay }} dollars in interest over the life of the loan.
While you should have 30 days to shop around on quotes before your credit rating takes a hit, Clark says that you should make a decision on your new loan and lock it in within 14 days of requesting quotes.
“It’s supposed to be 30 days, but if you look at what the credit bureaus say, I’m more comfortable with completing the process in 14 days,” Clark says. “That way people are focused on it, and there’s no chance they’re going to get more than one inquiry figuring into their credit score. “The beauty of setting a goal of getting all your quotes within two weeks is that you’re going to be consistent in the questions that you ask. If you let it go over many, many weeks, the rates could change and your questions could no longer be the same.”
When you’ve arrived at the quote that offers you the best terms, you’ll want to contact that lender and ask to lock in your rate.
Once you have confirmed you’d like to move forward with a lender, you can expect to receive a three-page document titled the “Loan Estimate Form.” This has replaced what used to be known as a “Good Faith Estimate.”
The Consumer Finance Protection Bureau offers the following tips for evaluating this form:
You can view a sample of the Loan Estimate form at the Consumer Finance Protection Bureau website link above.
Once you’ve locked in your rate and know approximately how much money you will be required to pay at closing, you may be wondering how to handle that money between now and the closing date.
Team Clark suggests that you consider parking it in a high-yield savings account. This helps you accomplish several things at once:
When it comes time to process your loan, the lender is going to do a more detailed evaluation of your finances to ensure that you are not a high credit risk.
While each lender may have its own list of financial documents it requires, here are some items you can expect to be asked for:
Note that the evaluation process will extend beyond your personal finances. It also will feature an assessment of your property including a professional appraisal of the home and market analysis of home values in the area. The lender will want to make sure that it’s not throwing more money at a property than it’s worth to them if you default on the refinanced mortgage.
Once the lender is comfortable with the financial information you provide and the information on your property, they will likely contact you to set up a closing date.
This process may be similar to what you experienced when you closed on your original loan for the property, but it probably won’t last as long.
You can expect this transaction to happen under the supervision of a title company, though some refinance closing transactions may just be recorded by a notary. If you are required to bring funds to the closing, you’ll likely need to be prepared to bring a cashier’s check or execute a wire transfer.
In my experience, the closing will require less than an hour of your time and will also require your signature on an extraordinary number of documents. Always remember to take your time and understand exactly what it is you’re signing. Ask questions if you’re unsure of anything. After all, you’re the person who is signing to take on years of financial responsibility here!
In the days and hours leading up to the closing on your refinanced loan, you’re going to want to be on high alert for suspicious phone calls, emails or documents. This is a time when scammers try to prey on unsuspecting homeowners who are expecting to move large amounts of money at closing.
If you give the wrong person sensitive information about a wire transfer, for example, they could steal thousands of dollars with little way for you to get that money back.
Clarks says a popular way this happens is when a potential scammer manages to hack into the email account of a mortgage lender, real estate lawyer or title company.
Once they’ve cracked the password of the vulnerable party, the scammers sit back and wait for sensitive loan information to be sent via email. And then they step in:
“They impersonate that individual and send false payment instructions for wires,” Clark says. “And you could end up wiring money to the crooks instead of to the closing. “Now, what you’ll always want to do is get verbal confirmation from where you’re making the wire to [before sending]. You want to talk to the individual with the closing attorney, title firm or whoever just to verify those instructions.”
When phone calls are required to confirm the wiring of money, Clark says he asks to be the one who makes the phone call rather than receiving it. That is an effort to avoid the chance that a scammer is impersonating one of the parties handling the transaction.
Always make sure that you verify the identity of the lender, bank or other party involved before you divulge any sensitive information over the phone or by email.
For most people, their home is one of the most expensive investments of their lifetime. So it’s important to make sure that you’re diligent in the refinancing process.
To recap, here are some of the important steps you should take:
If you complete these steps successfully, you should be well on your way to having a new mortgage loan that you can feel confident is a net benefit in your life for years to come.
This post was last modified on June 14, 2022 7:50 pm
Have you been considering trying Peacock? The time to commit may be now. The NBCUniversal-backed…
https://youtu.be/qi4gDzg8Fdg I want to donate to charity but I'm not sure about the most effective…
Are you sharing your Netflix account with friends and family? If so, you might want…
Ken Fisher has been one of the most recognizable investment personalities for decades. Outside of…
Are you a Comcast Xfinity internet customer? If so, you soon will have a new…
Max is in. HBO Max is out. Warner Bros. Discovery made headlines in May 2023…