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New Year, Same House, More Savings: Answers to 4 big refinance questions

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Reading Time: 5 minutes
Jan. 18, 2018.

Most homeowners are shocked to learn that hanging on to the same mortgage rate throughout the life of your loan isn’t encouraged, and it isn’t an industry standard. Just like routine home maintenance and budget balancing, loan officers recommend a yearly check-in to revisit your mortgage.

When you refinance your home, it’s out with the old and in with the new. This means that:

  • You could get a new mortgage to replace your old mortgage, a process lenders refer to as home refinancing.
  • Home loan refinancing is primarily done to help you get a better interest term and rate.
  • Your first mortgage will be paid off, a new mortgage loan will be created, and you may walk away with a better deal.
  • If you don’t find a more attractive mortgage option at your refinance meeting, then the deal stays on the table.

To put it more plainly, if you’ve long been eligible for a lower mortgage interest rate, neglecting your mortgage could be costing you more than you need to pay each month. This amount of “missed savings” can compound and get bigger with each year.

Savings alert! Get in touch with a Cornerstone loan officer to find out if you can benefit from a mortgage refinance.*

Loan officers answer 4 common refinance questions and explain benefits

If it’s been a year or more since you talked to your lender, they’d love to hear from you.

Your loan officer can help you get to the bottom of some of the most common home refinance questions, like:

1. Can a home refinance reduce a monthly mortgage payment?

Scott Cummins at Cornerstone Home Lending, Inc., NMLS #208602, has one basic rule of thumb for homeowners looking to save with a refinance: A refinance needs to earn its keep. That is to say, the savings needs to warrant the cost. A refinance can be used in some cases to reduce a monthly mortgage payment, depending on a borrower’s original loan terms and the adjustments that are made.

There are several moving parts in a mortgage that can influence the decision to refinance, Cummins explains. For example, if a home was purchased with a low-down payment mortgage that included mortgage insurance, a refinance at current market value may provide the equity to remove this monthly cost. Cummins qualifies, “Rates have been on the low end for quite some time now, so the expectation of refinancing and reducing your rate by a full point or more may not be met.”

Changing terms to a slightly lower rate may allow a borrower to keep the payment the same while shaving off several years from the note. This, Cummins says, equates to substantial long-term savings.

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Takeaway benefit: A skilled loan officer like Cummins can walk you through the potential payoffs of a mortgage refinance.

Many homeowners miss out by not checking in with their loan officer because they may be overwhelmed or intimidated, as Kelly Zitlow, Vice President at Cornerstone, NMLS #164330, has seen firsthand. When Zitlow was recently contacted by a past client over the summer about refinancing, they worked out a strategy to combine his first mortgage and his home equity line of credit, taking some cash out for home improvements.

“My client was so busy with life, he struggled to make the time,” Zitlow says. “I notified him the loan application could be accomplished in 15 minutes over the phone (during business hours), and many refinances require less paperwork than a home loan used to purchase a home.” Zitlow reports that her client’s refinance closed, he’s accomplished his financing goals, and he’s now saving $600 per month.

2. When is the right time to refinance?

“‘To refinance or not refinance?’, that is the question,” Cummins quips. “More accurately, that is the question many homeowners are asking friends at barbecues or co-workers in the lunchroom. They’re bombarded by online advertising and radio ads touting thousands of dollars in savings. But, how do you know when a refinance really makes sense?” Cummins says his clients come to him often with this simple question.

The question may be simple, but the answer is more complex. Cummins frequently works with his borrowers to come up with a goal or motivation to refinance. Many times, it may be as straightforward as reducing a monthly payment or shortening the loan term to lower overall interest. Other borrowers may be attracted to a refinance to consolidate debt, expand their house, or put in a pool (which we’ll discuss in more detail in point #4 below).

Zitlow agrees, “The right time to refinance really depends on the goal of the refinance. With home values increasing over the last few years, many people are able to reduce or eliminate mortgage insurance or utilize their equity to pay off debt or make those long-awaited home improvements.” Zitlow says she also regularly works with clients who are in the process of a divorce and are required to refinance to satisfy their divorce terms.

Takeaway benefit: The best way to find out if it’s the right time to refinance is by checking in with your loan officer.

For many homeowners, the outlook is good. Interest rates are still historically low. Zitlow says, “However, we do expect long-term mortgage rates to increase over the coming year. So, if someone is thinking of refinancing, now may be a great time to do so!”

3. Do you need a good reason to refinance?

Heeding his general rule — that refinance savings should warrant the cost — Cummins suggests his borrowers refinance only when their goals have been clearly identified. Costs should be weighed against the savings, Cummins explains, so you understand how a new mortgage will impact your payment and cash flow. If all these conditions have been met, “then a refinance just might be right for you!” Cummins says.

Takeaway benefit: We see homeowners refinance to lower their interest rate and monthly mortgage payment, change their loan terms, adjust their mortgage to reach their financing goals, consolidate debt, pay for a renovation, remove an ex-partner from their mortgage documents, and adjust a mortgage in cases where credit or income has improved.

You can request a quick refinance evaluation by sending your recent mortgage statement and any questions to your loan officer. They’ll be able to run the numbers and come up with some new refinance options that may work better for you and your family.

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4. Can I use a refinance for renovation?

Absolutely. Refinance has become a popular option for many borrowers when life enters new stages: When the kids go off to college, and you’re in need of extra cash, or when a longer loan term could provide some funds for home upgrades. If you’ve priced home upgrades hoping to improve the value of your house, you may know firsthand that most renovations don’t come cheap.

While a popular feature like an eat-in kitchen (coveted by 80 percent of homebuyers) can deliver a great return, it can run upwards of $5,000. “Kitchen renovations typically include new cabinets, appliances, flooring, and expansive kitchen islands,” J.B. Sassano, president of Mr. Handyman, a Neighborly company, says. Sassano estimates that a kitchen remodel may typically cost $40,000 or more, yielding an average return of 80 to 85 percent of every dollar spent.

Takeaway benefit: As Cummins suggested, creating a monetary renovation goal first can help you to determine if a refinance can cover the cost.

The good news is that a home renovation — and refinance cash-out — need not be extravagant. Whether you’re upgrading a bathroom or a kitchen, you don’t necessarily have to spend $40,000, Sassano says. “Spending $3,000 to include several upgrades in your bathroom is always a worthwhile investment and can help you enjoy a fresh look, and it’s also attractive if you anticipate putting your house on the market.”

If you haven’t checked in on your mortgage in a year or longer, there’s a loan officer ready and waiting for your call. We’re always happy to answer your questions. You keep us sharp, and we keep you informed.

*While refinancing could make a significant difference in the amount you pay each month, there are other costs you should consider. Plus, your finance charges may be higher over the life of the loan.

For educational purposes only. Please contact your qualified professional for specific guidance.

Sources are deemed reliable but not guaranteed.