Refinancing decisions should not be made on how ‘cheap’ a loan package is

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Because cheap refinancing packages may not remain ‘cheap’ throughout the tenure of the loan term refinancing decisions should not be made on this factor alone

refinancing decisions
Image credit: Alpha Stock Images

Traditionally, refinancing decisions have meant balancing the savings of a lower monthly payment against the costs of refinancing. However, with the cheap refinancing packages which are more readily available now, it can be worth your while to refinance to obtain a smaller reduction in interest rates. But before you consider the cheap refinancing packages, you should consider how long you expect to stay in your home. It is am important factor to consider as if you will be moving in a few years, the month to month savings may never add up to the costs that are involved in a refinance.

When you are making refinancing decisions, especially on cheap packages, there are several things to keep in mind.

First, if your current interest rate is significantly higher than the cheap refinancing packages rates, you may be able to roll your loan costs into the loan and still get a lower rate than you have today, thereby reducing your interest payments and saving money immediately.

Second, if you are planning to stay in your home for at least three to five years, it may make sense to reprice your existing mortgage loans and save on closing costs then getting the cheap refinancing packages.

Mortgage Repricing is the renewal of your existing mortgage plan with your existing lender without changing banks. The typical period to start reviewing your existing mortgage loans for repricing or refinancing should commence about four months before the ending of your package tie-in or lock-in period. This could range anywhere from between one to three years depending on the contractual terms when you first signed up the mortgage loan. At the end of this period your cheapest rate package, may no longer be the ‘cheapest’ in the market.

One main reason why homeowners should repricing or go for other cheap refinancing packages is because of the US interest rates. US interest rates are low now but it is unclear how long it will remain low.

Today, consumers have a wide range of home loan packages to choose from compared to several years ago. Home loans could also be tied up with other programmes which rewards customers with a higher interest rate on their deposits if they transact more with the bank, such as getting a home loan and crediting their salary with the same bank.

Typically, with mortgage loans you are offered attractive rates for the first three years when you refinance – following which the interest rates are adjusted upwards. This usually coincides with the end of the lock in period, offering borrowers a good opportunity to relook their loans.

The refinancing decisions of if you want to discuss mortgage refinance online or with a real person, either on the phone or in person, may also depend on your generation. But Covid-19 makes it necessary for all. One recent survey said that 70 per cent of millennials used an online process to complete all or part of their last mortgage application. In contrast, 55 percent of Gen-Xers did so, and 43 percent of Baby Boomers.

Overall, 45 percent of mortgage applicants completed the process entirely in person, while 16 percent completed the home loan refinance online. But no one can deny that the process of applying for a mortgage or to refinance was paper-intensive not that long ago, and you usually waited a month or more before knowing if the loan was approved. Now, the process has been streamlined by most financial institutions.

Instead of making calls or driving from bank to bank to get a rate quote, most online mortgage calculators can tell you this in seconds. After which, you can transmit all your documentation to the lender online without any hassle.

Some home loan refinance online applicants may get lower rates and fees because they are less overheads involved in processing their application. While online applications are faster, they often involve more work on your part. You are the one uploading the documents and data, not a loan officer. And keep in mind that lenders are not necessarily cheaper, which is why you need to compare rates and terms.

On the other hand, if you need help with your application, most financial institutions which offer the best home loans have made it more difficult to get hold of a loan officer during regular business hours. Also, mortgage refinance online applications may not be well-suited for complex loan applicants.

Most people who are self-employed, may need to talk with a real person, as the documentation they  need to submit to substantiate their application may be too complex for an online application to support.

Finally, you should know that some mortgage companies do not make loans themselves, but submit your information to third-parties to help you get the best home loans. While some of these mortgage brokers oeprate legitimate mortgage-related businesses, other may turn out to be con artists who may bombard you with emails and calls after you press the “submit” button.

One survey shows that the majority of home buyers would like to obtain a mortgage quote online, as it allows them to make fast comparison shopping. Calling individual mortgage lenders or making the rounds in person on the other hand, can take considerably longer to compile the data that you need to make the final decision with regards to the best home loan.

And also when too much time may have lapsed between the receipt of Quote A and Quote B, the comparison may become meaningless – especially since interest rates may change quite often.

Written by Ravi Chandran

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