Interest rates for home financing have declined to new lows and many people are refinancing their homes. If you decide to refinance your home, there are many considerations. Do you want to shorten the loan period with the interest savings and have an increase in your house payment resulting in saving a lot in interest costs? Do you want to keep the same loan term and have more money available for your family budget?
On the surface refinancing sounds like the best thing to do for most people, particularly if you can save several percentage points from your existing loan with the new loan rate. We are in the process of refinancing our home. When we bought the home two years ago from the time we looked at the home and decided to buy it to the closing date it was less than a month. That is not the way loans are now. With COVID-19 and the influx of refinancing going on, it can take several months for the loan to be completed. There has to be an appraisal in most cases and the property owner has to pay for the appraisal outside of the loan. The appraisal cost was $500 and our home had increased in appraised value by over 18% in two years. The borrower has to supply all the previous tax year returns along with the supporting data, like W-2 forms and 1099 forms, the id verification of the property if it is a modular home, and verification from the HOA that all dues are current. If the home is not on a foundation, a tie down inspector is necessary which costs $500 and if a tie down is necessary it can cost as much as $1,200. A termite inspection needs to me made and reported to the loan originator. Flood plain verification has to occur to determine if you have to have flood insurance.
The closing costs for our loan are going to run over $4,000 which is added to the loan. We changed from a 30 year fixed loan to a 15 year fixed loan. Our equity declined by the $4,000, it will take about four years before we return to the equity level we currently have under the existing loan. After that the equity per month begins to be higher than we currently have and the loan will be paid off in fifteen years. Our house payment went from $525.00 a month for the loan payment, property taxes and insurance, to $628 per month for the fifteen year period. Of course the house payment can be adjusted annually by the financing bank to assure that there is enough in the escrow to pay the property taxes and insurance along with the loan.
It has been over two months since we began the process and the loan originator said she hopes to have our loan by the end of December. The first month after a refinancing there is no house payment which helps a little bit. The bank locked in our rate when we first applied at 2.75% which turned out to be a bad move since interest rates continue to decline. This morning I got an email with the current interest rates for home financing, the average rate for a 30 year loan is 2.41% and the average rate for a 15 year loan is 2.25%. Even if we did not get the lowest rate of 2.25% , we probably could have gotten a rate of at least the 2.35%. In this case we should have said we do not want the rate locked in we want to go with the market.
I investigated getting a GI Loan which they advertise was being very advantageous for veterans. I have never used my GI Loan which is a one time offer. A veteran can only get a GI loan one time. There is a $2,000 fee changed for Vets getting a loan plus the normal closing costs. In other words it would cost $2,000 more to get a GI loan than a conventional loan. The only advantage for a veteran with the GI loan is that they can buy a home with zero down payment.
They tell you to shop around when refinancing. We are refinancing using the existing loan company we had on the soon to be old loan. I looked on line at some of the other options but some of them look pretty shady. When they say no closing costs and no appraisal be careful there are other fees and charges hidden in the loan in most cases.
I hope this example has helped if you are considering refinancing. If you decide to refinance good luck in the slow process and changing interest rates. Also we do not know what the policy of the new administration with be that affects refinancing.