This is part of our ongoing series about maintaining and supporting your financial investment through home equity and mortgage refinancing.
So you cleaned out the garage, the kitchen cabinets, and your junk drawer … and now you’re wondering what to tackle next. Should you groom the dog yourself (“woof?”), shred tax documents from 10 years ago, or start an overhaul of your mortgage loan? Amidst COVID-19, you’re quarantined at home, you may feel at least a little anxious and nothing is safe from your search for distraction.
Or maybe this isn’t you. Maybe the last thing on your quarantine agenda is anything to do with cleaning, or bathing pets (or yourself – no judgment!) or finances. Perhaps you’ve taken up learning guitar or maybe you don’t feel like doing anything at all. These are all OK. Everyone copes with stress differently and we’re just here to offer support.
But for those who are giving their mortgage the side-eye, part of why refinancing may be on your mind is because it was a hot topic in the news before the pandemic. Why was this the case? Interest rates dropped for more than a year before hitting a 50-year low in early March 2020, giving homeowners with higher rates (say, 4.5% or above) an opportunity to switch to a new loan with a lower rate (like 3.5%, for example).
So if you are considering refinancing, here’s a breakdown of what to consider under normal circumstances – but especially during COVID-19.
What is refinancing?
Refinancing is the process of paying off an existing mortgage loan with another on the same property. It requires shopping around and applying for a new mortgage. You’ll need to go through all the steps, from boosting your credit score to compiling financial documents, underwriting, and closing the loan, all over again.
(Need a refresher? See our post “7 Steps to Take Out a Mortgage.”)
Why would anyone do such a thing? One reason, as we said, is to jump on an opportunity for a lower interest rate, but that isn’t the only incentive to refinance.
Some homeowners switch from a 30-year mortgage down to a 15-year, for example. This will actually increase your monthly payments, but it’ll also chop the amount of time that you’ll be paying a mortgage (and interest on that mortgage) by half.
Other incentives to refi include leaving an FHA loan for a conventional loan to do away with a mortgage insurance premium (MIP) or to change from a variable-rate loan to a fixed. Back in the days before COVID-19, some even refinanced to cash in on equity to send a kid to college, build a bigger kitchen, or travel (remember travel?).
What should you consider before refinancing?
Michael Tanney, a financial advisor with Magnus Financial Group in New York City, says there are three key things to keep in mind when thinking about a refi:
- Do consider it. Since interest rates have dropped drastically, if it’s been three years or longer since you took out your mortgage or last refinanced, it’s helpful to at least learn about the options that are available now. “There’s zero risk in just taking a look,” Tanney says. (If your loan is less than three years old however, it may not be worth the cost of a refi for just a slightly lower rate.)
- Map out your goals. Are you in a starter house that you plan to sell in a few years, or do you aim to stay until your oldest kid goes off to college? Are you in it for the long-haul and plan to live there until or through retirement? Though 30-year mortgages are the most common, they’re not necessarily the best option for all homeowners. If you’re moving on in less than five years, an interest-only mortgage (for which the borrower pays only the interest for a set period of time) may be a better fit. And in the end if you feel safer going with the standard 30-year, at least you gained some knowledge. “For educated consumers who made a decision based on the information they learned, it makes a big difference to their psyche and their ability to make better choices,” Tanney explains.
- Shop around. While you can just call up the lender for your current mortgage and ask what they have to offer, it’s a good idea to shop around for various options. Another method is to start with your local bank and then expand to national lenders, Tanney notes. You never know who has a better deal until you ask.
Keep tip: If you don’t have time for this legwork, consider going through a mortgage broker. The broker fee can add to your costs, but it might be worth it – especially if, without help, you’d end up not refinancing.
Is refinancing a form of loss mitigation?
Not really. Loss mitigation is when a loan servicer reviews and possibly modifies mortgage terms so a homeowner can avoid foreclosure.
Refinancing typically is not an option if you’ve missed any mortgage payments in the last 12 months – and if you’ve ever been more than 30 days late it’ll show up on your credit report, which is taken into consideration by lenders while reviewing loan applicants. Since loss mitigation (which we explain in our post “Loss Mitigation Explained: How to Catch Up if Your Mortgage Falls Behind”) is normally offered to those who fell behind or are in dire risk and borrowers in that category aren’t ideal candidates for refinancing, refinancing isn’t technically considered a form of loss mitigation.
Meanwhile, those who are on unemployment do not qualify for a new loan – a circumstance that unfortunately applies to many during COVID-19.
That being said, if your income decreased but is stable at the lower amount, you may be able to refinance and those who haven’t been late on a mortgage payment could use the option to become more financially stable.
Who else can offer guidance on refinancing?
Another resource available to help you is a housing counselor. Housing counselors (sometimes called advisors) provide trusted, unbiased guidance, often for free.
They can help compare different loan options and/or determine if refinancing is worthwhile based on your current loan, the proposed new loan and your future plans (for example, when you plan to sell the house you’re looking to refinance). These advisors can also help you organize your documents for the loan application process and even talk to a lender or servicer on your behalf. Wow!
So where can you find one? The U.S. Department of Housing and Urban Development (HUD) provides government-approved housing counselors. You can also search for them through the Consumer Finance Protection Bureau and the National Foundation for Credit Counseling.
Want to learn more about housing counselors and what they can do for you? Check out our post “In a Jam? Maybe a Housing Counselor Can Help.”