What to know and ask during the refinance process!
Lauren Nygren, Senior Loan Officer, Cherry Creek Mortgage
Rates have been volatile all year and this post-election market has been no exception! While we don’t expect rates to come down in direct correlation to Fed rate cuts, we do expect refinance opportunities to arise. If you currently have a rate in the 6-8% range, here is what you need to know:
1) Beware of scams! — Your home purchase and even the name of your lender is recorded as a matter of public record so expect many offers and scams. Some may even appear to be from your lender or reputable sources so be aware of refinance rates that appear to be too good to be true!
The reality is that any rate is available any given day, it is just a matter of what you pay for it. Predatory lenders may advertise a low rate, but not be up-front with the costs associated with that rate. The costs of the refinance (including any points paid to buy down the rate) can be rolled into your new loan amount so be wary of any discount fees or increases to the proposed loan amount! The monthly savings aren’t worth it if you are paying a significant amount of fees.
2) Calculating your payback period/break-even point — The biggest factor in deciding whether a refinance makes sense is the break-even point: how many months do you need to be in the loan for the monthly savings to recoup any closing costs paid? If the total cost to refinance is $1,700 and monthly savings as a result of the refinance transaction are $350/month, you would break even in 4.85 payments. On average we like to see clients break even in six payments or less, unless there are other motivators such as cash out, or a change of loan term etc. You can include any closing costs in your new loan balance so the costs of the transaction do not necessarily mean cash out of pocket at closing, but the costs should be considered!
3) You CAN refinance at NO COST — A “no cost” refinance means you elect a rate slightly above market which has lender credits to offset all of the costs of the transaction. This approach is common right now to lock in near-term monthly payment savings at no cost! Idea being that you can then refinance again if rates come down further.
Overall, rate is not the only question to be asking when you refinance. Be sure to ask what the total closing costs are and what your break-even point will be. It could be worth asking for a no-cost refinance quote as well to take advantage of interim savings while we wait for rates to (hopefully) come down further. If you have any questions or would like a mortgage analysis, please don’t hesitate to reach out.