ON THE ROAD TO REFINANCE?

Consider these tips from local lenders to reach your financial goals
People often start thinking about refinancing when interest rates drop and a window of opportunity opens. If your budget keeps getting tighter every month, refinancing to a lower rate could give you some breathing room to pay off bills, chip away at credit card debt, or finance a major life development, like having a baby or sending a child to college.
Even though you may get excited about the possibility of finally coming up for air, there are many factors to consider first.
The finance journey
Tessa Rider, VP mortgage loan originator with Freedom First in Salem, says there hasn’t been a lot of refinance activity in the past couple of years because interest rates have been much higher than the historic lows during the COVID-19 pandemic, but that will change when rates begin to fall.
“Typically, the best time to refinance is when the market interest rate is lower than your current rate,” Rider says. “Generally, you want an interest rate about a percent lower than where you’re at to make it worthwhile.”
Bill Herbert, senior vice president-private banker with First Bank & Trust Company, says it may also be worth shortening the loan term, if your situation allows.
“If someone is looking down the road for a way to help themselves out financially, it may make sense. The interest rate could be lower on a 20-year or 15-year mortgage than a 30-year, so if you try to lower the interest rate and shorten the term, that’s going to end up saving you a lot of interest over time.”
In choosing to step down to a 15-year loan, he says, many people will never have to refinance again.
“So much goes to the principal that you can really see the balance go down every month. That is an ideal situation. You have to be ready potentially for your payment to be higher, and you have to be able to stomach that, but it’s something to look at when you’re considering refinancing.”
Common hazards
Two factors impact your interest rate on a new loan: your credit score and loan-to-value (or LTV), the amount of equity you have in your home.
Herbert advises homeowners to check their credit report before they decide to apply. (Free annual reports are accessible online). The higher the credit, the better terms of financing. A common mistake people make is not checking their score early enough in case there are problems that may take time to dispute.
If people know their credit score, they can set themselves up for a better refinance situation by paying down some debt first, like that ever-growing credit card balance. He warns against closing out a card, however, because that can negatively impact your ability to borrow and your credit score.
Rider says people often make the mistake of lengthening their term when it’s not absolutely necessary just because they see a lower payment in their immediate future.
If someone originally signed a 30-year mortgage and comes to refinance back to a 30-year 10 years later, “They’ve erased the 10 years they’ve paid into it,” she says. “If it’s the only way to keep you from losing your home or going bankrupt, then obviously that’s OK, and we’ll still do it. But if you have choices, you really should do it to match your current term that you have left on your mortgage, or shorten it; that’s the most financially savvy thing to do.”
Rider also warns people not to make large purchases or major financial decisions directly before the refinance closes. On the flip side, after a refinance goes through, try to avoid the trap of believing you have so much extra money that you can spend more.
People also need to be prepared to pay the closing costs involved with refinancing and be wary of lenders that promise a no-closing-cost option. Herbert says while closing costs are typically not as high as when you purchased your home, costs will still apply and can be estimated beforehand so homeowners are not caught off guard.
The cash-out detour
When a family is in dire circumstances, they may take an alternate route like a “cash-out” mortgage option, where they sign a new loan to use to pay off a current mortgage — plus some. This is often done for the sole purpose of debt consolidation or using the cash for needed improvements on the home. Twelve months of payments are required before being eligible for a cash-out.
And if it’s not advantageous to look at refinancing the whole mortgage, Herbert says, “We may look at doing a second mortgage and put it on a 15-year term and consolidate either that debt or take care of a home improvement. That way, you’re also not spreading that debt out for 30 years. A second mortgage would be more appropriate, especially if someone had a low interest rate on the first mortgage.”
Mapping out the route
If customers call and ask for a basic idea on rates, Rider will first ask them general questions, plug their answers into an automated system, without requiring all the necessary documents or running a credit report, and see what rates they could get to compare to their current rate. “People could still just call for inquiry and get a pretty easy answer in five minutes about where the market is.”
Likewise, Herbert said the first steps would be a phone call to go over where the customer stands financially.
“Everyone’s situation is different; you can’t paint with a brush and cover everybody. Every person has their own situation, and we like to look and see how we can help each person.” ✦
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