Do’s And Don’ts Of Refinancing

With all of the bad economic news we have faced in recent years, one glimmer of hope remains: The lowest mortgage rates in our lifetime. A 30 year fixed rate mortgage is attainable for under 5%. With such low rates, there has been an increase in refinances. According to the Mortgage Banker’s Association, a national organization representing the real estate financing industry, nearly 80% of recent loans are attributable to homeowner refinances. This article will explore the do’s and don’ts of refinancing and offer some tips on whether refinancing is for you.
The first step is to understand how a mortgage loan is repaid. Each month you pay down your mortgage, you also pay interest. At the beginning of the loan, most of your payment is applied towards interest. As time goes by, less is applied to interest and more goes towards principal. The point is, you may be several years into a loan payment with significant amounts of interest paid. Upon refinance, you would have a new loan and your payment clock starts once again, with interest heavy payments. You will want to explore if it makes economic sense to start all over again.

Keep your eye on rates. Mortgage rates continue to be a moving target. People who applied for mortgages in early autumn were able to secure a 4% fixed rate on a 30 year mortgage. That rate has consistently crept up and, at this writing, is in the area of 4.875%, which is still comparatively low. None of us can predict the trend in rates, so be watchful and shop around.

Crunch the numbers. Although you may be struggling to make payments on your current mortgage loan, see if it makes economic sense to refinance. Know that when you close your loan, there will be closing costs and escrows which you will need to pay to the lender. They could add up to a few thousand dollars. Have a frank discussion with your officer to try to “uncover” all closing expenses. These expenses should be considered to determine whether you will save money in the long run. You may also want to consider increasing the principal amount of your loan to cover closing expenses, and perhaps to borrow extra funds for a “rainy day”.

Watch out for official-looking junk mail you receive. There are several lenders (some unsavory ones) competing for your business. They will mail you official looking materials, offering you an opportunity to reduce your current mortgage payments. Be careful and selective, and start with your current lender to determine its refinance rates (or outright modification of your existing loan). Be careful who you provide your personal information to also, in this day and age of identity theft.

Be careful with Adjustable Rate Mortgages (“ARM’s”). An ARM often has an incredibly low up front rate that will change at a date in the future. With rates as low as they are now, a fixed rate is your best option. You know what you will pay each month for the life of the loan.

Assist your lender to get you to the finish line. Be ready to provide your lender with all relevant information they may need. The sooner you do that, the sooner you will be able to close your loan. The written approval of your loan application (the “Commitment”) will have deadlines including a period of time that your approved rate will not change (a “rate lock”). You do not want to lose your rate due to the untimely delivery of information to your lender.

Know that you can walk away. You have gone through all the steps to get your refinance in place. You close your loan. You wake up the next day and have second thoughts about what you just did. Each and every refinance has a 72 hour rescission period. If you have changed your mind (or found a better rate with a different lender) you can rescind (undo) the loan. While this rarely happens, this is something you may well avail yourself of.
In a nutshell, you have an opportunity to create savings for yourself through a refinance but make sure it is and will be a true savings in the long run.

James J. Delia is a Partner at WJ&L who practices in the Land Use and Real Estate areas.

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