Four Tips for Refinancing

November 10, 2015 –  

It seems people dread the idea of refinancing.  The hassle… the confusion… the time it takes…, etc.  The fact is, the last several years have provided a great opportunity to refinance.  Refinancing is one of the easiest, low risk ways to save money, and it’s usually a lot of money, for example $10,000 to $60,000 for a typical home loan.  Once someone gets past the idea of the amount of time it takes to refinance, basically a few hours to shop around for a good bank, and another few hours to organize the paperwork and go to the settlement, then here is a list of four things to focus on when refinancing:  

1.  Determine the outstanding balance for your existing loan.  You can do this by calling your bank, or by logging in to your online account and seeing the information there.  Next, you can use the Loanreader “Refinance” calculator and create the amortization schedule for your existing loan.  You should expect the calculator to give the same outstanding balance for your loan as what your bank tells you.  If it differs, double check the details which you entered in the calculator, and also consider if you made extra payments in the past [in the Results section where the amortization schedule is displayed, you may enter in extra payments made in the past, and this may help to arrive at the correct outstanding loan balance].  

2.  While shopping, ask each loan officer how much money it will cost you to refinance.   When speaking with the loan officers, your primary goal should be to identify two numbers:  the INTEREST RATE, and the CLOSING COSTS which refers specifically to the “out of pocket” money you will need to pay.  Out of pocket costs could include points and origination fees, for example.  See the Closing costs Help button in the Advanced view of the Loanreader Refinance calculator which explains more about closing costs.  When you have these two pieces of information, enter them into the Loanreader Refinance calculator.  You’ll notice that the New Loan Amount is automatically calculated for Loan #1 and #2; this is done on purpose to make it easier to manage the numbers and ensure you are comparing information from different banks on equal terms.  Note:  you can adjust the new loan amount if you desire, and this can be done within the Advanced view.    

3.  Inquire about the bank paying for your Closing costs (meaning you actually pay $0 for refinancing).  Having the bank pay for all the closing costs can be a good option to consider, especially if interest rates may fall in the future.  This has been the situation between 2009 and 2015.  The idea is when/if the interest rates become lower in the future, you can refinance again, and you don’t have to worry if you have yet recouped your closing costs previously paid because you never paid closing costs in the first place.  But paying closing costs may be okay to do, if the bank offers you a good interest rate.  With the Loanreader Refinance calculator, you can measure exactly what each bank is offering, side by side.  Again, it’s primarily the INTEREST RATE and the CLOSING COSTS which represent the bank’s offer. 

4.  Measure your cost in the near future such as 4 years or 8 years, especially if you may sell the loan at that time.  The idea is whenever you pay back your new loan in the FUTURE (e.g., pay it off yourself, or sell your home, or refinance again), this is when your cost is determined.  At that point in time, you will have paid a certain amount of interest to the bank and gained a certain equity (% of ownership) in your home.  When using our Refinance calculator, review the Total Cost Graph and the snapshot costs.  These snapshots allow you to see cost in the near future which is useful, especially if you plan to pay off/move/refinance at that time.  Paying attention to the cost at the end of the 15 years or 30 years (and it seems everyone does this) is not that important to do because that cost is true only if you stay with the loan for the entire period of time, 15 or 30 years, for example.  

The Refinance calculator takes into account when your existing loan started, and provides a comparison of multiple loans on equal terms, basically aligning all the loans according to the same calendar.  The calculator also “skips” the first payment for the newly-refinanced loan which helps to ensure you are accurately evaluating your options. 

Example:  one bank offers a 4% rate where you pay $3,000 in closing costs, and another bank offers 3.75% where you pay $5,500 in closing costs.   Which is better for you?  It can be difficult to decide.  Depending on when your existing loan started and other factors such as interest rate and closing costs, it is possible to make a good and clear choice.   Use our Refinance calculator and see the difference for yourself.