Re-financing Isn’t as Hard as You Think – Here’s Why
A recent report from real estate listing website Zillow found that 78% of homeowners skipped their chance to refinance their mortgage at record low rates in the past 12 months. The half who did refi said they saved $300 a month or more with the money move, a Zillow press release stated.
Federal interest rates continue to hover near zero, making it easier than ever to save money with a home refi. Average mortgage rates in January 2021 dropped to an all-time low of 2.65%, according to the Freddie Mac Primary Mortgage Market Survey. In June of this year, rates rose slightly to 2.93% — still enough for homeowners who refinance to realize substantial savings.
Why would people hesitate to refinance for monthly savings or even draw cash from their home’s equity in a cash-out refinance to pay off higher-interest debt or remodel their home?
Breaking Up Is Hard to Do – Refinancing Is Not
A separate survey from mortgage services provider ServiceLink revealed some of the reasons people chose not to refi last year. Forty percent of the respondents said they were comfortable with their current rate, while 27% said they were waiting for rates to drop further.
The perception also exists that refinancing your home is hard to do. In the Zillow survey, 29% of respondents said they did not refinance because they didn’t understand the process. Others (38%) said fees were too high, and 37% said they were either moving or paying off their mortgage soon.
Of those who refinanced, respondents said that the process was “easier than divorcing a spouse” but “more difficult than training a puppy.”
Why Refinancing Is Easier than Taking Out a Mortgage – Or Training a Puppy
Some people may think training a puppy is a walk in the park compared to a home re-fi. But you can make the refinancing process even easier than showing Rover how to “heel” with the right knowledge and tips.
“In general, refinancing a mortgage should be a bit less intense than a few weeks away at puppy boot camp,” said Jonathan Lee, Zillow Home Loans Senior Director. “A few hours of online shopping, talking to a mortgage professional and signing documents is a small price to pay for hundreds of dollars in potential savings per month, and goes a long way toward funding those dog training classes.”
Refinancing is different from the mortgage process when you’re buying a home because it:
- Requires less paperwork than applying for a mortgage or closing on a home purchase
- May not require closing costs or out-of-pocket fees
- Doesn’t require a lawyer
- Doesn’t involve a seller or a real estate agent
- Doesn’t require a home inspection (although an appraisal may be needed)
Refinancing your home is also substantially cheaper than buying a house. You can even find lenders that don’t require you to pay closing costs, so you can reduce your out-of-pocket fees when you refi.
If you opt to refinance with no closing costs or no money down, however, those costs may either be rolled into the loan or reflected in a higher interest rate, according to online lender RocketMortgage.com.
Speak to your mortgage professional and read the fine print carefully so you know exactly what you’re paying for and can be certain your refi will save you money. Take heart, as only 8% of those in the Zillow survey said their refi did not save them money.
Can You Skip the Appraisal Process?
During your home’s appraisal, which is required for most refi loans, the lender determines if your home is worth the value you’re refinancing it for. This can be stressful if you have an older home that needs obvious work. With home prices at all-time highs right now, most homes should appraise for more than their original selling price.
However, if you have a government-backed loan such as an FHA, VA, or USDA loan, you may be able to skip the appraisal with an FHA Streamline Refinance. You must also meet a few other requirements, including holding your existing mortgage for at least 210 days and 6 monthly payments, with only one late payment permitted in the past year and none in the past six months. Keep in mind, the FHA Streamline Refinance does not allow you to draw cash from the loan. You can only refinance up to your current mortgage amount.
Tips to Make Your Refi Go Even More Smoothly
As easy as it is to refi, you’ll first want to run the numbers to make sure a home refi makes sense for you. In the past, experts said that if you could lower your interest rate by 1% or more, it made sense to refi, according to Zillow. But rapid home appreciation gives people reasons beyond cost savings to refinance.
“There are a lot of benefits to refinancing a home right now,” Zillow’s Lee said in the press release. “Fast-rising home values make cash-out refinances a great option, allowing homeowners to tap into the increased equity of their home and reinvest their savings in other areas, like paying down high-interest debt, funding tuition or completing a home improvement project.”
See: Mortgage Closing Costs: What They Are and How Much You Can Expect To Pay
Find: What You Need to Know Before Taking Out a Joint Mortgage
If you decide to go ahead with a refi, you’ll want to check your credit report shortly before you apply for the loan to ensure your credit score is as good as it was when you took out your mortgage. Borrowers with credit scores of 720 or higher will secure the lowest rates.
Then, gather the necessary documents such as tax returns and pay stubs that your lender will need to verify your income, Lee advised. Additionally, you’ll want to avoid making other major purchases until the loan closes, to avoid reducing your bank balances or increasing your credit card debt.
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