How Homeowners Knew Refinancing Was The Right Move For Them

While investing may get the lion’s share of attention, when it comes to financial planning topics, plenty of other aspects are equally, if not more important.

For example, back in March, as equity markets were tumbling, few of us could have imagined there may be any positive developments from the COVID-19 pandemic. 

However, as the Federal Reserve pledged to keep interest rates anchored around 0% for at least five years, many homeowners realized they could refinance their mortgages to get a better long-term rate.

“For us, it was a very easy decision. We wanted to move to a 15 year mortgage for awhile, but interest rates were too high. When the rates dropped, we were able to lock in at 2.5% with a slight increase of payment,” says Kristy Marshall, founder of personal finance education company Money Bliss. 

Marshall encountered a bit of a hitch before closing could be completed. 

“The process was a little interesting because of the new protocols put in place,” she adds. “The overall process was pretty easy and straightforward – all completed digitally. Instead of meeting at a closing office, the title company sent out a notary to close the loan and overnight our documents back to them. They were lost by the delivery company. So, it was a pretty intense week while the lender and title company figured out a plan B. Thankfully, the documents arrived before we had to start over.”

She adds, “For us, it was the best decision. From the start we should have only taken out a 15-year mortgage. I wished we were given better advice as a young couple. However, in the end, it all worked out.”

HELOC was a bonus

Ricardo Pina, founder of personal finance site The Modest Wallet, had two objectives for refinancing.

“I personally decided to refinance my mortgage to access my home equity in order to invest in my business and lower my interest rate,” he says. “I was also able to obtain a Home Equity Line of Credit (HELOC) while refinancing my home, which is something I didn’t have before. That was a nice bonus.”

Fortunately, his refinancing process went smoothly. 

“The process of refinancing my mortgage was easy and fully online as it was done in May 2020 during the first wave of the pandemic,” Pina says. “The bank was really helpful and somewhat sophisticated to get all paperwork signed digitally so I didn’t have to go to a physical branch.”

He adds, “I’m really happy with the decision to refinance my mortgage as I was able to kill two birds with one stone. I was able to lower my interest rate and also access my home equity to invest in my business. Overall I’m really satisfied.”

Homeowners interested in refinancing must account for closing costs, even when they are able to get a significantly lower interest rate. The costs are similar to the costs incurred any time borrowers get a mortgage. Sometimes the closing costs may be rolled into the mortgage balance, but either way, they must be factored in. 

“We decided to refinance mainly because our interest rate dropped by 1.375%,” says Sam Hawrylack, co-owner of personal finance blog, How To FIRE.

 Even after closing costs, she says, “We are still putting a significant amount more of equity into our home each month. This was attractive to us because we are looking to move in the next few years. The additional equity will help us to have a larger down payment and move sooner than we thought.”

 Hawrylack says the refining process was easy and straightforward, for the most part. “It took time to provide all the necessary information and documents at the beginning of the process. After that, it was as simple as waiting for the mortgage company to move through their processing and underwriting process. We did make sure that we looked through all of the disclosures that were sent to us, as they had a few mistakes on them that would have cost a few thousand dollars! Because of COVID, we were able to hold closing at our home which made things easier and more convenient.”

Do your math homework

 Hawrylack and her husband did the calculations to determine that refinancing was the right move for them. 

 “We are very happy with our decision, especially because we did the math ahead of time. We are essentially saving more money by putting a larger portion into principal than interest each month. It also further along our goal to move in the next few years,” she says.

 Often, homeowners believe they can’t refinance since they only recently purchased their homes. That’s not necessarily true, however. 

 Forrest McCall, owner of Don’t Work Another Day, a personal finance, investing, and entrepreneurship blog, refinanced to get a better interest rate, although it had only been two years since he originally purchased his home. 

“I was able to lower my interest rate by more than two percentage points, saving thousands over the life of the loan,” he says. 

McCall’s refinancing process went easily. 

“To get started, I was approached by the original mortgage broker I used to purchase the home. From there, he verified my income and ran a credit check,” McCall says. “I was not forced to get an appraisal or inspection on the home because of how recently it was purchased. I filled out all of the paperwork and was approved within the week. I closed on the refinance within the month. The entire process was a breeze and super simple.” 

He is happy about the decision, although rates are even lower today than when he refinanced. “By refinancing, I lowered both my interest rate and monthly payments, not to mention skipping one payment in the process,” he says.

Refinancing a rental property

Disha Spath, MD, is CEO and Founder of The Frugal Physician, a blog that helps doctors get out of debt and manage their finances. 

“We had planned on doing a cash-out refinance of our rental property this year, even prior to the pandemic,” Spath says.  

She cites the favorable rate environment, as well as a Fannie Mae FNMA and Freddie Mac financing fee of .05% going into effect December 1, as motivations. 

Spath and her husband had a strategy behind the move, in addition to lowering their rate. 

“We did a cash-out option to harness some of the accumulated equity in the house and re-invest into another rental property.  With this strategy, we were able to turn one rental into two and decrease our interest rate at the same time from 3.75 to 3.375%,” she says. 

However, the process was not always easy. “I’ve taken out several mortgages before and this was definitely one of the more frustrating ones,” she says. “The processing times from the lender were very long, I’m guessing because people are working from home and they have a very high volume of refinances at this time.”

She had to call the lender several times to get rate-lock extension fees to be taken off, as the delays in the closing were caused by the lender.  

“There were also several mix-ups with getting a notary to come to our home for closing and issues with doing it safely outside with masks on, etc.,” she recalls. 

Ultimately, she is glad she made the decision to refinance. “This cash out refinance was always in our financial plan, but the current environment has made it even more advantageous by lowering our interest rate,” she says.

Source: Forbes – Money