NEW YORK (MainStreet) —With interest rates hovering at historic lows and threatening to bump up in the next few months, now seems like prime time to refinance. There's one problem, though: many homeowners who can refinance, simply won’t, because they're are a little lazy, mistrustful and confused by complex ideas like refi.
This according to the research from the National Bureau of Economic Research, which notes a fifth of homeowners who could refinance, don’t – leaving $5.4 billion on the table.
But here’s the thing: refinancing isn’t complex, and you’re not lazy. Once you know what you’re in for and you plan accordingly, you can save some serious cash from refinancing – the NBER says a median of $11,500 is forfeited from not doing so, but on some loans, you can save much more than that.
So brush off the Cheetos dust and pick up your mortgage - it’s time to save some money before it's too late.
Prepare for Paperwork
For many people the hardest part about refinancing isn’t figuring out the math; it’s providing the paperwork.
“The banks have tightened up – literally [refinancing] was a joke before, but now it’s the opposite way,” says Cary Carbonaro, managing director of United Capital Private Wealth Counseling in New York City and Certified Financial Planning Board ambassador.
Carbonaro says she has perfect credit and a steady trail of income statements but has been going through the refinancing process for three months because of the demand for more paperwork.
“People who haven’t refinanced in the last five years are astonished by how many docs they need,” agrees Jesse Harwick, vice president of Equity Now in New York City.
“Be prepared and give them every single thing they want, potentially up front," advises Carbonaro. "Have all your ducks in a row.” Collect your tax returns, bank statements, recent paystubs and all other proof of income. Be prepared to give them everything, “including a pint of blood if that’s what they asked you for,” she says.
Come into a refinancing loan like you’re looking to buy a house in today’s market. Gather your paperwork and expect follow-up questions. Ask what statements can be submitted online to reduce the paper load.
Ignore the 1% Rule
Here’s an old rule of thumb you may have heard: You shouldn’t refinance unless you can get at least 1% less on your interest rate. Except that’s not always true.
“The fact is that there are occasions where a reduction in rate of even a quarter of a percent can provide benefits,” says Joseph Parsons, a senior loan officer with PFS Funding in Dublin, Calif. who also runs The Mortgage Insider blog. Do the math and find your break-even point to see when you’ll be saving money, and match that with how long you plan to stay in the home.
(To find the break-even point in number months, take the total savings per month and divide it into the total closing cost amount. So if closing costs were $6,000 and you saved $200 a month, it would take 30 months before you broke even with those closing costs and began saving money.)
It Isn’t Always Expensive or Only For Long-Term Homeowners
Many homebuyers might hear "closing costs" and shrink away from refinancing altogether. Or maybe a homebuyer plans to move in five years and assumes it’s a stupid idea to refinance, because he won't ever break even. That’s not necessarily true if you can find the right loan.
The trick is to look for a loan that rolls the closing costs into it or settle for a higher interest rate for a rebate to reduce or eliminate closing costs.
“A general rule of thumb is that a change in rate of 0.125% will change the points or rebate by 0.5 percent,” says Parsons.
So if you have $3,500 in closing costs on a $350,000 refinance with an interest rate of 4%, you could be able to accept a higher interest rate of 4.25% and receive a 1% rebate of $3,500, wiping out your closing costs.
“This kind of scenario, sometimes called a ‘no cost refinance,’ can make sense where the borrower intends to have the loan for a comparatively short time—less than three or four years," says Parsons. "They reduce their rate and save money without incurring any costs paid out of pocket or added to the loan. In a scenario like this, any reduction in the rate results in a net gain to the borrower.”
The Banks Don’t Want to Refinance…Do they?
Some people don’t refinance, because they hear horror stories and don’t even try. Your mileage may vary on this one.
Carbanaro says the three months she has been trying to refinance have been “hell.” She suspects lenders are less willing to refinance now, “because they don’t want low interest rates on their books,” she says.
But Parsons says the idea of lenders not providing new refinancing loans is absolutely not true and the idea that only the most credit-worthy people can qualify is part of a “false narrative.”
He says even homebuyers with low credit scores – usually 580 for Federal Housing Administration loans and 620 for conventional loans – and even with 3% down payments can still get a home if they can document their income and assets.
“A homeowner with minimal equity has the same kinds of options available for refinancing,” says Parsons.
But Carbanaro, who has clients in both Florida and New York, says most of her clients interested in refinancing haven’t been able to do so.
“I’ve had one client [in New York] successfully refinance,” she says.
Always Shop Around
The best solution to the potential problem above? Call around and ask. You won’t know if you don’t try, so beat the procrastination by first calling your lender and asking if you can refinance. Then go to some competitors and try to get pre-qualified (getting a non-binding quote from a lender going off the income information you provide). Get good faith estimates from at least two or three lenders and compare.
And don’t be afraid to venture out of your town or county.
“Shop around for rates, and don’t rely on banks in your area," says Bryan Marsden, editorial coordinator of FatWallet.com. "I drove an hour to a bank in another city for 0.25%. It may not sound like much, but over 15 to 30 years it adds up to be a lot.”
Remember, mortgage loans can – and usually will – be sold at least once to another lender. Your goal is to get the best rate and the best terms, not the lender with the nicest office. Expect that you won't have to deal with only them throughout the life of your loan.
Drop Bad Lenders
After the financial crisis, many consumers are leery of banks and lenders. Just remember this: if your lender is too demanding, keeps bothering you or seems shady, drop that lender. That’s what Carbonaro did when she first went to refinance last year and wound up with a lending company clerk calling her at all hours of the day to make demands.
“I literally withdrew the loan from being harassed,” she says. There are lots of lenders out there – find one who wants to do business with you and who doesn’t charge a commitment fee.
When you do, Carbonaro says, it’s a good time to lock-in the rates, as they are expected to rise the further along we get into the year.
--Written by Craig Donofrio for MainStreet