5 Smart Refinancing Habits That Can Help You Save More
When mortgage rates drop, refinancing can be an opportunity to lower your housing costs, improve monthly cash flow or make your mortgage work better for your financial goals. But getting the most from a refinance means looking beyond the new interest rate or monthly payment.
A few smart refinancing habits can help you evaluate the full financial picture before replacing your current mortgage. Here are five to consider.
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1. Look Beyond the Monthly Payment to the Total Cost
A lower mortgage payment is one of the biggest attractions of refinancing, but according to Brian Crist, a loan officer with Guild Mortgage, "Ignoring the overall economics of the transaction” is worrisome.
Jasmine Grove, a senior market analyst at BrightPath Loans, explained that people often overlook the fact that a refinance resets the loan clock because the payment drop “feels like a win."
“But they've just added years of interest back onto the balance, and if you run the total cost of borrowing over time, plenty of these deals leave the homeowner worse off even at a lower rate," she said.
The math only works in the borrower's favor if they either shorten the new term to reflect the years already paid down, or they're explicit with themselves that they're trading long-term cost for short-term cash flow, Grove added.
Of course, extending the term isn't always a mistake, especially when improving cash flow is the primary financial objective. The problem is doing it without recognizing the trade-off.
2. Compare the Cost of Getting a Lower Rate
Borrowers naturally look for the lowest mortgage rate, but the rate alone doesn't tell you whether refinancing is worthwhile. Crist called this, “Getting sucked into the 'lower rate' fallacy."
Lower rates sound great, but they often coming at a cost that can take many years to recoup. Points, closing costs and other expenses can erase some or all of the benefit, particularly if the borrower doesn't keep the mortgage long enough.
Crist urged borrowers to ask what it will cost to get that rate and how much interest you'll actually save.
3. Calculate Your Break-Even Point
Refinancing costs money, so homeowners need to know when the savings will outweigh those costs. This is especially important for anyone who might sell the home or refinance again before reaching the break-even point.
Borrowers should scrutinize fees, Grove said, and “ask for the line-item breakdown and compare it against the break-even timeline,” or how many months it takes for the savings to actually cover what they paid to get there. “If nobody can tell you that number quickly, that's the red flag,” she said.
Even simpler, Knag suggested divide closing costs by “true monthly savings” to get your break-even number. “Comparing a new 30-year payment to a payment with 20 years left isn't savings, it's stretching. Anyone likely to move or refinance again before break-even is paying for a deal that never pays them back,” he said.
4. Understand How Rolled-In Closing Costs Work
Borrowers who don't pay refinancing costs out of pocket may feel as though they've avoided them. The reality of “no-cost” refinancing is often that “the closing costs are simply added to the borrower's loan amount,” Crist said.
Whether refinancing expenses are paid upfront or incorporated into the transaction, borrowers should identify what they're paying and how those costs affect the overall economics. Grove recommended asking for a line-item breakdown, so you can see all the costs, including origination charges, points, title work, and various administrative fees.
5. Compare Your Options Before Choosing a Cash-Out Refinance
Cash-out refinancing can give homeowners access to equity, but it changes the economics of the mortgage itself. This deserves extra scrutiny when a homeowner already has a favorable mortgage rate because refinancing often “means giving up the low rate on all of it,” Crist said.
Cash-out refinancing can itself carry somewhat higher rates, as well, Crist said.
“On a conventional loan, for example, a typical cash-out refinance will be 0.125% to 0.25% higher in rate than a rate-and-term refinance," he added.
Always Consider The Full Cost of a Refinance
A refinance shouldn't be judged by how appealing the new payment or interest rate looks at closing.
“A refinance should either solve a financial problem or enhance the borrower's long- and short-term financial goals,” Crist concluded.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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