Refinancing to Change Loan Terms

Many Americans dream of the day they will purchase their first home. Unfortunately, many first-time home buyers don’t receive optimal loan terms due to their credit history or the current interest rates. Time has taught us that the economy is cyclical and eventually interest rates go down after they’ve risen. This decrease often prompts many home buyers to consider going through the refinancing process. This process allows lenders to analyze a homeowner’s situation to determine if they qualify for a new mortgage with a lower interest rate, potentially lowering their monthly payment and total interest payments over the life of the loan.

Reducing monthly mortgage expenses can have a tremendous impact on a household’s financial health. If you find yourself in the same position as many Americans, living paycheck to paycheck, this extra monthly income can allow you to achieve some short-term goals such as paying off high interest credit card debt or building your emergency fund. This can seem like an ideal solution for many homeowners that are looking to increase their monthly cash flow therefore, when interest rates start to decrease, there will generally be a boom of refinancing that follows in the market.

As with most financial decisions, the costs, as well as the benefits, must be considered. The hidden costs of refinancing are often overlooked due to the excitement that comes with putting extra cash in your pocket. Refinancing is essentially getting a new mortgage at a lower rate to pay off your old, higher interest mortgage. This means, as with a conventional mortgage, refinancing has closing costs and fees., In fact, according to Freddie Mac, the average cost to refinance is around $5,000 .  Other costs to consider are the various fees associated with a new mortgage such as attorney fees, credit report fees, and title services. These can add up and will have to be paid out of pocket to close the loan. Some lenders offer “no-cost” refinancing which generally means they offer a higher interest rate and roll the costs into the loan. While this might seem like a good idea to avoid closing costs, it can end up costing you more over time. The actual lifetime cost of a loan is often missed when homeowners think only of the new lifestyle these lower monthly payments can bring and forget to consider how refinancing may actually harm your financial autonomy in the long term.

For example –
Jack and Mary first purchased their home in 2010 following the mortgage bubble that caused many Americans to lose their homes. Home ownership was a source of pride for this couple as they had worked tirelessly to save enough for a down payment to buy their dream home: a 4-bedroom, 2-bathroom colonial with original features including wood trim. This home had served as the backdrop to their biggest moments as a couple and was the home they raised their family in. In 2016, the couple read news reports that the market was offering interest rates of 4.5%, which was lower than their 6%, 30-year term mortgage.

They decided to reach out to a lender to see if they could qualify for a lower interest rate. After an initial conversation with their lender and the payment of a $500 appraisal fee, they were on their way to getting that lower interest rate. The appraiser came to their home and assessed the property. Now they would wait to hear from the lender that they were okay to move forward.

Unfortunately, the call they received did not come with good news. The appraiser deemed their home value to be less than what they currently owed on it – making the couple’s mortgage ineligible for refinancing. After some back and forth discussion about the value of the appraisal, the couple realized their only refinancing option was to pay another $500 fee to get a second opinion.

 Instead, they decided to put money towards renovating their home in hopes of increasing the value as they waited for the market values to increase.   In the end, they were out $500 and felt frustrated with the whole process.

Refinancing can be a great solution for homeowners looking to reduce their monthly expenses, but it may not be an option for everyone. We recommend reviewing these decisions with a financial advisor to determine what the best step would be.

GW Financial, Inc. is a fee-only firm and offers a complimentary Getting Acquainted Call to help set you on the right path. Click HERE to schedule a 30-min personal check-in. 

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