Mortgage rates have been dropping to record lows in the wake of the pandemic, which has left many homeowners — including myself — wondering if it’s time to refinance their mortgage.
After hearing that our neighbor got a 2.8 percent mortgage interest rate for her home, my husband I decided to look into refinancing our own mortgage. But I had to admit: I had no idea what to expect. Here are a few things I was surprised to learn when I tried to refinance my mortgage.
YOU CAN REFINANCE A HOME YOU JUST BOUGHT
Because my husband and I only bought our home three years ago, I initially wrote off the notion of refinancing. I mistakenly assumed that there were rules or a timeline you had to follow before you could refinance a home. But, it turns out, I was wrong.
“There is no minimum time you need to wait before refinancing,” explains Matt Frankel, mortgage analyst for The Ascent. “If you buy a house with a 30-year mortgage rate of 4 percent and rates fall to 3 percent a couple of months later, there's no reason you can't refinance. Virtually all residential mortgages these days have no prepayment penalty, so you can usually refinance right away.”
However, Frankel does note that you may have difficulty refinancing with the same lender if you’re looking to refinance shortly after purchasing your home, so you may need to look at some different lender options. And Tom Spaniel, a loan originator and mortgage broker, adds that many lenders ask homeowners to make at least six months of payments before refinancing or selling. “If the client moves forward and pays off the current loan before the six payments have been received, the loan officer is usually required to pay back their full commission to the lender,” he explains.
Some refinancing restrictions also exist if you don’t have a conventional loan (like if you have a mortgage through the Federal Housing Authority), or a lender may have specific rules of their own. But for the most part, there weren’t any restrictions my husband and I noticed while we were looking into refinancing. Whether or not refinancing makes financial sense, of course, will depend on your situation, but knowing that it was a possibility for us was news to me.
You might see some mortgages labeled as ‘no closing cost’ because you don’t pay closing costs upfront, but those costs don’t disappear.
YOU’LL HAVE TO CLOSE ON YOUR HOME ALL OVER AGAIN
When you refinance, you’re basically getting a whole new mortgage and, in some cases, with an entirely new lender. That means that you’ll have to go through the closing process — closing costs included — all over again, too.
Those could include application fees, loan origination fees, title fees and possibly private mortgage insurance, among other costs. You might see some mortgages labeled as “no closing cost” because you don’t pay closing costs upfront, but those costs don’t disappear; they are typically tacked onto your loan balance, or you’ll cover them in the form of a higher interest rate than what you could have received if you had paid closing costs.
Also, typically your home will have to be reappraised, which means appraisal fees as well. My friend Danielle, who had recently refinanced her mortgage, told me she and her husband had paid $450 out-of-pocket for their appraisal, on top of other closing costs that included pre-paying interest until the start of their new loan and fees to file the necessary paperwork. The entire process, she said, was like “rebuying our home.”
Frankel says that the cost of refinancing often comes as a surprise to homeowners. A typical refinancing will run you about 1 percent to 3 percent of the new loan balance, although that can vary among lenders, which makes shopping around and comparing refinancing options key. Frankel notes that on average, for a 30-year mortgage, you can expect to pay $320 in origination fees for every $100,000 in principal. However, he adds that there can be significant differences between lenders, so it does pay to shop around.
THERE’S PAPERWORK — AND THEN MORE PAPERWORK
In a refinance, because you’re applying all over again for a mortgage, expect to fill out a lot of paperwork — and with a lot of paperwork comes, of course, a lot of waiting. “I did not realize it would take a full four to six weeks to get the online account and the paperwork process going,” Danielle had told me. In some cases, going with the same lender could help make the paperwork requirement less intense.
When I was looking into refinancing, the paperwork portion completely overwhelmed me. I didn’t even know where to begin and spent several hours just trying to get to the point where I understood which paperwork was even necessary to start the process. Fortunately, a lender we had been considering was incredibly helpful and patient in walking me through the process. Ultimately, though, we stayed with our existing lender because they offered the best rate, most straightforward paperwork process and a different way to lower our costs than what we expected (more on that below).
What I learned was that if you are interested in refinancing, it may be helpful to gather all of your paperwork ahead of time, including tax documents, bank statements, pay stubs, current debt and assets (such as retirement accounts, investment accounts or rental property income), business account information if you’re self-employed, and your existing mortgage information. “Be prepared to provide business P&L’s, balance sheets and bank statements within 30 days of closing, in most cases,” Spaniel says.
YOUR LENDER MAY BE ABLE TO OFFER OTHER OPTIONS BESIDES A REFI
When I was exploring refinancing, I went all in. I filled out piles of paperwork, researched lenders and spent hours on the phone. Because we have a farm, our loan situation is also more complicated, so the process was incredibly daunting. I was even told at one point that we likely wouldn’t be eligible for a refinance.
Finally, I decided to just call our existing lender to see if they had any options I hadn’t explored yet. Much to my surprise, they did. Our lender offered us something called an interest rate conversion. With only one page to sign and a simple $800 fee, our lender kept our existing fixed-rate mortgage and loan terms but lowered our interest rate by a full point.
Although interest rate conversions are more commonly done when converting an adjustable rate mortgage to a fixed loan, Spaniel says there has been a recent trend of some lenders offering them in order to keep the loan — in some cases, with no fees at all. In our case, the interest rate conversion made the most sense, allowed us to keep our lender (with whom we have a great history) and was the most straightforward process. The lower interest rate, along with a small, extra monthly payment toward our principal, will allow us to save $100,000 over the life of the loan.
You may also want to explore if a mortgage recast might be right for you. Spaniel explains that a mortgage recast is typically available as a one-time event if you pay down a significant amount on your loan principal. Although a recast won’t change your interest rate, your lender will recast your mortgage payments based on the new balance and existing terms, so you’ll have a new lower monthly payment.
COVID-19 MIGHT SLOW THINGS DOWN
Even as COVID 19-related changes have driven interest rates down, the pandemic has also complicated the refinancing process.
If your banks and lender are not physically open to customers, paperwork must be submitted electronically — which means if your bank branch isn’t used to handling digital applications, wait times can get longer. Plus, you may have to get creative on how to attend an in-person closing. I had to meet with lending officials in not one but two different parking lots to file all the required paperwork.
Although I was initially intimidated, the process of learning about refinancing ended up being an unexpected crash course in financial education for me. Although we ultimately found a different solution, the knowledge that I gained will help save money for us in the long run — which has been an incredible weight off my mind, and my wallet.