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
Carletha Tweedy, mortgage manager with Central Virginia Federal Credit Union (FCU), says while many people took advantage of the historically low interest rates a few years ago, there are still benefits to refinancing today.
“I tell people that your home is your biggest investment,” she says. People should know and value their equity — the hard-earned money they have already paid in — and learn how to use it to their advantage when refinancing. The goal might be to secure a lower rate and pay off a mortgage sooner or ease some financial stress by lowering the payments.
“Sometimes they have more equity than they knew they had previously,” she adds, and more equity means a better advantage when applying for a refinance option.
“Refinancing is not always done to get a lower rate (a general rule of thumb is a 2 percent decrease in order to recoup any savings), but a lot of times it’s just because life happens.”
In her 30 years of guiding families in banking, Tweedy says she’s seen every life scenario that can lead to refinancing, from a death in the family, loss of a job or change of a job, mounting medical bills, and even in planning for retirement.
“It’s the only loan that will allow you to stretch it out to make it more affordable,” she says.
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.
Tweedy agrees: “Keep an eye on your credit. Look out for any blemishes and take care of them before you apply — at least 60 days before.”
Many lenders will also warn against making 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 closing costs and be wary of lenders who promise a no-closing-cost option. Herbert says while the costs are typically not as high as when you purchased your home, they still apply and can be estimated beforehand so homeowners are not caught off guard. Tweedy says most of the time, homeowners can roll the majority of their closing costs into the loan.
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. Typically, 12 months of payments are required before being eligible for a cash-out.
Tweedy says many people apply for a cash-out refinance because they need to pay off high-interest credit cards (especially with store cards that often carry higher rates).
But 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.”
Tweedy says a lender may also recommend an equity line of credit as a better option.
Mapping out the route
If customers call and ask for a basic idea on rates, lenders will first ask them general questions, plug their answers into an automated system (without requiring certain documents or running a credit report) and compare the going rates to their current rate.
“Have a clear objective going in,” Tweedy says, with a mutual goal among all parties to either stay the course, pay it off sooner with a shorter term, or refinance for a more manageable mortgage payment.
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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