Mortgage refinancing has become front-page news as the real estate market bucked conventional wisdom and outperformed all expectations during 2020. And while refinancing to a lower interest rate was all the rage in 2020, homeowners should understand the potential complexities regarding a refinance transaction, as well as when it makes sense to take advantage of a lower rate.
Can a Refinance Be Done Without a Credit Check?
When applying for a refinance, lenders are required to make a new credit decision that always includes a review of the borrower(s) credit history and score. This allows an underwriter to determine the creditworthiness of the mortgage applicant. Borrowers should remember that lenders determine an applicant’s eligibility by the four C’s –
- Credit – credit score/history.
- Capacity – income/employment history.
- Capital – available savings/investments.
- Collateral – the real property’s value/utility/location.
Does a Borrower Have to Change Lenders When Refinancing?
A borrower has the choice as to which lender they wish to use when refinancing – a new lender or the existing lender. The most crucial part of deciding which lender is the best fit should be based on the interest rate and the costs to close the refinance.
Does a Borrower Need 20% Equity in the Property to Refinance?
Homeowners who wish to refinance but do not have at least 20% equity in their home at application will be required to pay PMI – Private Mortgage Insurance. PMI is an insurance policy that protects the lender’s investment. It is likely that if you are required to pay PMI for a refinance, it is likely you already pay PMI with your current monthly payment, which makes this point somewhat moot.
How Many Times Can a Property Owner Refinance Their Mortgage?
The good news is there are no limits as to how many times a homeowner can refinance a mortgage. Some older (or subprime) loans may have a prepayment penalty, something a borrower should investigate before applying for the refinance. Remember, refinancing can be a prudent move, but it is not without costs.
Is it Worth Refinancing if a Borrower Will Save 1%?
While lower mortgage interest rates are a great reason to refinance, it is important to determine the following –
- How much will be saved based on the lower rate?
- How much will the closing costs be for the refinance?
The data noted above can then be used to determine how many years it will take to recoup the refinances’ expenses. For example – if you were to save $100 per month and the closing costs for the refinance was $4,000, it will take 40 months to just break-even – ($4,000/$100 = 40). So, for borrowers who intend to hold onto the refinanced property for more than 40 months, a refinance would be fiscally prudent.
The Take-Away
Choosing to refinance is an important financial decision that requires proper analysis. Before you jump headfirst into a refinance, speak with a mortgage professional like us who can help you understand if and how this financial decision will improve your financial picture.
