We hear it in the news and on commercials every day – “Rates are the lowest they have ever been before and now is the best time to refinance!” Of course, every day there also seems to be a flurry of news reports declaring that “Banks are not lending and the requirements are so stringent that only those who could basically pay cash for their homes are able to obtain a mortgage.”
Supporting this off-putting claim is recent research by Freddie Mac, which found that nearly 38% of homeowners could benefit from refinancing but did not think they would qualify or did not want to go through the hassle. Below are a few ways to approach a refinance that should help you navigate your way through the system, lower your rate and ultimately save you some money:
1. Establish yourself with one bank and with a personal banker therein. Banks are continuing to look for ways to increase fees and they often do this for individuals who only have one product, such as a checking account. If you consolidate some of your financial services with one institution, oftentimes you can gain access to discounts on your other banking services, as well as a mortgage. Banks are no different than a high-quality clothing store in that the more you “shop” with them, the better access you will have to their products. This could mean a savings, checking, brokerage, credit card, equity line of credit, money market account and whatever else they offer.
2. Don’t just shop for rates. Instead, research the safety and longevity of the financial institution. Mortgage companies can be excellent alternatives, but finding one through a friend or a professional that refers you to them is a much better alternative than going with an ad or mailing. A big reason for doing this is that you want your re-refinance to be successful and on time, and someone else’s (positive) experience is apt to give you a far greater chance of choosing a reputable institution.
3. Complete all applications, disclosures and documents timely and accurately. In this increasingly paperless world that we all live in, financial institutions seem to be a holdout. To them, the more paper the better! The lending world is chaotic and highly regulated, so when a processer receives incomplete documentation, this will only delay the entire process. This can often mean missing deadlines and not being able to lock-in the rate you were hoping for. Many of the documents they will ask you for will seem like overkill:
– 2 years of W-2s,
– Copy of your driver’s license,
– Complete financial statement,
– Last 2 paystubs,
– 2 months of statements from all your financial institutions,
– Last two years tax returns that are signed and include complete copies of K-1’s,
– Homeowners insurance documentation, and
– A bunch of other personal documents.
Be prepared to spend some time rounding up the above, as well as your lender continuing to ask for additional documentation right up until the loan closes. Don’t be surprised if they ask for unusual documentation such as a copy of a divorce decree or detailed explanations for deposits and withdrawals in your checking account. Even when they request the same document twice (which they will) then send it again. I guarantee you this will become very annoying and frustrating, but keep in mind that this process is a necessary evil and that arguing with them and not providing the requested documents will get you nowhere. And, anything you can do to make their job easier will only help you in the long run.
4. Please don’t make the transaction personal. For instance, the value that the appraiser will put on your home is not necessarily what it would sell for and does not measure the intrinsic value of all your family memories and life experiences. Remember that this transaction is purely business – the financial institution is only interested in the value of your home for collateral purposes and your ability to pay back the loan.
5. Be sure to select the right loan product for your situation. There are numerous options in the market place ranging from a fixed 15 or 30 year to different ARM (adjustable rate mortgage) products. Depending on your age, the amount of time you expect to remain in your home, your current and expected employment situation should all factor in to which product is best for you. Just because a 15-year fixed or a 5/1 ARM has a lower interest rate does not always mean that is the best product for you.
Along the same vein, just because your neighbor got a certain loan product does not mean it will work for you. Let’s say that in early 2000, Harold Homeowner had a mortgage loan for a 15-year term and paid it that down over an 8-year period (almost half of the term). Then, the economy crashed in 2008/09 and Harold refinanced to a 30-year mortgage, in case he lost his job and couldn’t afford to lock in a higher payment. In doing so, Harold cut his payment in half by stretching the time out and also because he had repaid a large portion of the principal payment during the first eight years.
Lastly – and perhaps this is stating the obvious – but once you successfully refinance and have your new loan, please do not forget to make the first payment! I say this because on a refinance where your bank is paying off the old mortgage with the new mortgage, there will be a gap of a month or two where no payments will need to be made. Most of the time you will be asked if you want an auto draw from your checking account, which you can either agree to or instead set up an auto bill payment. And then there is always the old fashioned way – via a paper check!
Good luck with your refinance and please feel free to contact us about any unanswered questions you might have about the process.