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How low will they go—is now the time to refinance?
The uncertainty of living during a pandemic brings a lot of questions with it, especially in regards to financial decisions. For instance, deciding whether now is the right time to refinance your house may be a source of stress for you. But don’t worry—we have some thoughts on how you can decide if now is the time to refinance:
You probably learned about the Great Depression while you were in school. But, if you take a closer look at history, you will see that the economy is less like a straight line and more like the path of a yo-yo as it ebbs and flows. Living in one of the low points is never ideal, but rest assured that even in leaner times, refinancing is still possible.
Looking at the present
So you know what has happened before—now it’s time to look at your current situation. What do you hope to accomplish through refinancing your home? Are you looking for a lower interest rate, or do you hope to adjust the terms of your mortgage? Knowing your goals will allow you to move forward with a plan.
Looking to the future
Is the house you’re in the one you plan to stay in for the next few years? In other words, will you really benefit from refinancing your home? Look for the “break-even” point on your mortgage options to see if the new payments will make sense for the amount of time you plan to stay in your current home.
Decide if you’re ready
Your mother probably once asked you if you would do something wrong just because your friends were doing it. The same concept applies here—just because interest rates are low, or because you have seen friends successfully refinance their homes, does not mean it’s the right time for you. Take the time to decide if this is the best step for your current circumstances.
Research the process
If you have never refinanced before, the process will feel a lot like buying your home for the first time. But it’s still a good idea to research the steps you will need to take and what types of materials you may need to have available, like loan documents or other paperwork. There are multiple resources out there to help you find the information you need.
Find an expert
Your questions don’t have to go unanswered—talk to someone, like your accountant, about the questions you have and what you can expect from the refinancing process. Someone who is already familiar with your current financial situation will have better insight on what you can handle.
Look for the signs
Just as you might keep track of deals that car dealerships are offering, it’s a good idea to keep your finger on the pulse of economic developments. For example, while you can’t gauge whether refinancing is the right step for you based off low interest rates alone, seeing those rates go down means you are more likely to get a better rate if you refinance.
Check your credit score
Times are tough, and if your credit has taken a hit since you last refinanced your homes, you may not be able to take advantage of all the options available to you through refinancing. Be sure to check your credit score before refinancing (which we recommend you do regularly anyway) to keep track of any changes.
Consider your job stability
Just like when you bought your home, refinancing factors in a steady income. If you are not sure whether your job will be around in a few months, or if you will be working steady hours, you may want to wait until you are settled into more reliable employment.
Take the plunge
If you think this is the right time to refinance, then don’t wait—go ahead and start the process. It may take several months to finish your refinancing, so the sooner you can make the decision, the sooner you can enjoy your lowered interest or shortened mortgage term.
Only you can decide if the time is right to refinance, so do your research and consider all of your options. It may not be the right time for you, and that’s okay. If it is, go ahead and take that first step.
How deferred payments can help you through a financial crisis
Right now, many people have been unwillingly thrust into difficult financial situations. It leaves some wondering how they’ll continue making payments on their cars, credit cards, or other loans they may have. As a way to relieve some financial burden, you could apply to temporarily defer your payments. We’ve broken down the ins and outs of suspending a payment to help you weigh your options.
What is a deferred payment?
Deferred payments, sometimes called payment holidays, allow you to temporarily delay or suspend payments on a loan—generally a consumer loan. If you’re experiencing financial hardship, deferring a payment could be beneficial, as it temporarily halts the burden of making repayments. It could impact you in the long run—you may end up with higher monthly payments, and your loan’s term will increase. But, it’s better than accumulating multiple missed payments and late fees.
How does a deferred payment work?
To start, you’ll need to fill out an application with your lender. Once your application is approved, you can suspend your qualifying payment, without worrying about late fees. You must continue making payments until you have verification of your application’s approval. When your deferred payment period ends, you’ll resume your regular payments.
Does a deferred payment affect your credit?
The short answer—no, a deferred payment generally does not affect your credit score. When your application is approved, your lender reports to the credit bureau that your payments are deferred. But, if you stop making payments or miss a payment due date before you’re approved, those missed payments could damage your credit. If you missed payments before you applied for a payment holiday, those won’t be removed from your credit history, either.
Are you still charged interest on deferred payments?
You may be responsible for interest that accrues while your payment is postponed. You could potentially receive a break if your interest rate only applies to your principal balance—which means you won’t be charged interest on the interest that accrues. However, once you restart payments, the interest that accrued during your payment holiday could be added to your principal balance, and your interest rate would then be applied to the new, larger principal balance—meaning even more interest could accumulate once you resume your regular payments. This all depends on your loan type and lender, so it’s best to confirm with them.
What alternatives are there?
If you ultimately decide you don’t want to defer your payments, there are other options available if you need financial support. Depending on the loan type, you could consider refinancing. Your new loan could potentially have a longer term or lower interest rates, leading to lower monthly payments. You may also consider a debt consolidation loan. Check with your lender to discuss potential alternatives.
If you require financial assistance because of COVID-19, click here to see how Georgia’s Own is helping members during this time of need.
SIx mistakes to avoid when refinancing your home
Mortgage rates are at an all-time low, which is an ideal time to swap your current home loan for one with a better rate or term. Most homeowners choose refinancing to reduce their monthly payment, and why not? Your mortgage just went on sale!
Others want to use some of the equity they’ve accumulated to fund a remodel, a large purchase, or an investment.
Refinancing is a terrific option, but it’s not as simple as signing a few docs, and you’re out the door. In some instances, refinancing can actually increase your interest rate rather than lowering it. It can be costly, so be sure you do some legwork before you seal the deal.
Here are six of the most common mistakes that homeowners make when refinancing their mortgage:
1. Thinking refinancing all about the rate
When you refinance your mortgage, you’re in the market to save some money. For most borrowers, that means a lower interest rate. There are, however, a lot of other factors that affect mortgage pricing, like closing costs, origination fees, and points, for example.
All of these costs can vary from one lender to another. A super-attractive low rate can be used to disguise a loan with unusually high fees, or it can be based on paying discount points up front. Make sure you’re comparing apples to apples. Ask about the additional costs that are factored into the price and be wary of major changes made after the fact. You want a mortgage lender who invites you into the process and helps you choose the pricing options that best meet your needs, not theirs.
2. Not objecting to junk fees
Expect some fees when you refinance, but be on the lookout for junk fees. Closing costs like loan origination, title, and application fees are legitimate and unavoidable, but some lenders might add on additional costs. Document preparation or delivery, or an excessive charge for pulling your credit report are some common examples of bogus fees. As a general rule, if you can hire someone to do it for less or can do it yourself for free, question it.
Although not necessarily a junk fee, you should also object to a prepayment penalty fee. Might you pay off your loan early? Probably not in the way you think, but remember, paying off your loan early also includes refinancing it again in the future, which is always a possibility.
Prepayment penalties are common in a “no-cost” refinance where the lender recoups those costs by charging a slightly higher rate. They usually expire in a few years, but it ensures that the lender still gets paid if you sell or refinance before they can recover the refinancing costs. If you must agree to a prepayment penalty in order to get your loan approved, make sure it does not apply after more than 3-5 years.
3. Not getting enough bang for your buck
There are costs to refinancing your loan, so make sure you’re a winner in the end. If you refinance and only reduce your rate by a small fraction, maybe half a percentage point, you need to calculate your break-even point—the time it’ll take you to recoup the cost of refinancing your loan. If you save $100 a month, it’ll take you just over four years to recoup your $5000, but if you only save $50, it’ll take you twice as long. Do you plan to stay in your home for more than eight years? For some, that’s an absolute yes, for others, a definite no.
Generally, experts agree that you need to save at least three-quarters of a percent to make it a smart transaction, but each borrower’s plans and circumstances are different. Just make sure it’s not only advantageous for the here and now monthly payment, but also your long-term financial future.
4. Taking out too much equity
Many people refinance as an opportunity to borrow against the equity they’ve accumulated in their home. It’s an attractive way to borrow money because the rates are low compared to other types of loans, and the interest is usually tax-deductible.
Borrowers should be careful, however, that they don’t take out too much equity and leave themselves at risk if housing prices take a deep dive—again. No one ever wants to owe more than their house is worth. You also don’t want to boost your mortgage payment so high that there’s no wiggle room should a financial emergency arise. Leave enough cushion, so you’re not living on the edge.
5. Stretching the term of your loan
Most borrowers begin homeownership with a 30-year mortgage. They pay it down for a few years and then refinance. Now they’re into another 30-year mortgage. Sure, it reduces your monthly payment because you’re spreading your remaining principle over more time, but chances are, even with a lower interest rate, you’ll pay more over the lifetime of the loan.
Unless you’re financially stressed and need to reduce your monthly payment, you might consider refinancing into a new, shorter-term loan that’s closer to the time you have left on your current loan. Shorter-term mortgages traditionally have lower rates. You can save money and a few years on your mortgage without a significant increase, if any, in your current monthly payment.
6. Skipping the Good Faith Estimate review
The Good Faith Estimate is a detailed breakdown of your mortgage loan, including the interest rate and all fees. Be sure to review it carefully and make sure it matches your expectations, without any exceptions. Also compare your final documents at closing to the Good Faith Estimate, especially when it comes to fees. Don’t hesitate to questions any discrepancies and don’t be afraid to walk away if there are significant differences. Chances are that the Good Faith Estimate and the documents will be in good order, but some unscrupulous lenders may try to tack on some fees at the last minute to generate extra income on the loan.
Refinancing your mortgage has advantages and disadvantages, too. So, do your homework, find a reputable lender, and work together to find a mortgage solution that meets your objectives. As a smart shopper, you already know what to look for and which questions to ask, so you’re already ahead of the game.