CONSIDER THIS: Understanding how to refinance intelligently

The landscape of mortgage refinancing is shifting, but that shouldn’t necessarily scare home owners away from considering this financial move.

According to a Georgia Credit Union Affiliates 2018 GCUA Mid-Year Consumer survey, 55.3 percent of the more than 8,000 respondents have refinanced a mortgage. And most Georgians – 73 percent – believe the best reason to refinance a mortgage is to take advantage of better interest rates, payments and/or loan terms.

Fewer Georgians are comfortable utilizing a cash-out refinance option to pay for home improvements (11.7 percent), to pay off higher debt (5.2 percent) or to pay for a big purchase (1.7 percent).

Conventional wisdom says the respondents have the right idea about the most beneficial use of refinancing. It’s typically considered a better idea to refinance to save money on the loan rather than use the equity in a house for debt or purchases.

A common way to save money through refinancing is to find a loan with a lower interest rate – but that method may be more difficult to implement these days. The improving economy has led to increasing interest rates on a variety of loans, including mortgages, notes a recent report from Back Knight, a real estate data provider.

According to Freddie Mac, a 30-year fixed-rate mortgage had an average interest rate of 4.59 percent in May. That’s an increase of 0.58 percent over last year and a rise of nearly a percentage point since May 2016. The country is still enjoying a relatively low mortgage rate environment – the same loan had an average rate of about 6.04 percent in May 2008.

But the gradually rising rates does mean fewer Americans have the incentive they need to refinance to a lower mortgage rate. According to an Investopedia article, consumers have historically been guided to look for a 2 percent interest rate decrease before refinancing. Today, some investors say 1 percent is enough of an incentive.

Those rates are becoming increasingly difficult to find. With interest rates climbing in the first six weeks of 2018, approximately 1.4 million Americans lost the interest rate incentive – that 1- to 2-percent rate drop, according to a MarketWatch article.

About 5 percent of borrowers in the United States still have access to that interest rate incentive to refinance their homes. Georgians stand about in line with national trends – 5.9 percent of borrowers in the state still have room in their current mortgages to find a 1 to 2 percent drop in interest rates.

But the key to successful refinancing, even in a rising rate environment, is for consumers to look carefully at their individual situation. Falling interest rates may be a common reason to refinance, but it isn’t the only one.

For example, if the homeowner originally opted for a 30-year loan with relatively small monthly payments, but is now in a better financial position to make more substantial payments each month, it might make sense to refinance to the mortgage with a shorter term. The interest rate might not be significantly lower and monthly payments may increase – but the customer will save money on interest over the shorter lifetime of the loan.

Perhaps a current loan is structured to include a balloon payment at the end and the homeowner wants to refinance to restructure the loan terms. Or, consumers may have a genuine interest in putting the equity in their home to use to pay off debts or pay for home improvement projects, in which case a cash-out refinance would be attractive.

Consumers shouldn’t discount refinancing their mortgages solely because of rising interest rates.

Tips for smart refinancing:
• Be sure refinancing is the right choice for you. Refinancing isn’t the best option in every situation. Before considering refinancing your mortgage, make sure you know the rate and term of  your mortgage as well as how that compares to current rates and terms in the market. It’s important to understand how much you stand to save by refinancing before making the decision.
• Understand why you’re refinancing.Make sure you have a clear goal in mind for your refinance. If you need to free up money in the short-term, you may want to consider shopping for a loan with a significantly lower interest rate or monthly payment. If you can afford larger payments each month, but want to save over the life of the loan, shopping for a shorter-term loan may make more sense.
• Raise your credit score. Make sure your credit score is in good shape before making the decision to refinance your mortgage so you can get the best possible interest rate. A credit score in the mid-700s will serve you well. To raise your credit score, pay down credit cards, make on-time payments and avoid taking on new debt before refinancing.
• Shop for the best loan originator.There’s more to take into consideration than your new loan’s interest rates. Make sure you’re shopping around for institutions offering the best loan origination and document fees. It can also be valuable to search for a loan agent you trust to help you find a mortgage loan that best serves your financial position.
• Buy mortgage points. Homeowners can buy mortgage points, also known as discount points, to reduce their interest rate. Mortgage points are fees paid directly to the lender at closing in exchange for a lower interest rate. One point costs 1 percent of your mortgage amount – so $300 on a $30,000 loan. “Buying down the rate” basically allows you to pay some interest up front to achieve a lower rate over the life of the loan.
• Credit unions are uniquely equipped to help members understand how to find the best loan for them. To find a credit union near you, visit asmarterchoice.org.

Insider Perspective:

Adrian Farris, the assistant vice president of mortgages at Emory Alliance Credit Union in Decatur, said consumers need to keep their own personal situations in mind when they’re considering refinancing their home.

“The best time to refinance is largely based on where the member is in their current loan,” Farris said. “When the market is good and rates are steady, that’s a good time to consider refinancing, generally. But members should also consider what their goals are for refinancing.”

In general, Farris said consumers looking to save money through refinancing should look carefully at loan terms. They should try to find a loan as close in possible in length to the time remaining on their current loan – but with less cost.

“If you’re refinancing at the same term, meaning you started at a 30-year loan and you’re going back to a 30-year loan, you’re going to want to see a rate decrease of a point or more,” he said. “I’m always looking at what’s going to benefit the member financially, unless that’s not their end goal. You have to look at all the factors.”

Farris said he believes credit unions are uniquely positioned to help members seek out the best refinancing options for their given situation.

“Our approach to lending is different than other financial institutions,” he said. “I’m here to help that member, so I spend a whole lot more time with the member. It’s a lot more personal between myself and the member. They appreciate that and they appreciate the good information we can provide them that they don’t receive at other places.”