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It’s said that everyone likes a winner, and when it comes to a great refinance deal the successes, triumphs, and champions involve money and often much more. These are the refi’s where borrowers get ahead – and often far ahead – with newer and better financing.
But what is “better”? What are the things to look for, and what should be avoided? Here’s how great refinance deals are made.
Save with Rate-and-Term Refinancing
Saving money is a major refinancing goal. The more you save each month the better.
The usual route to savings has been the basic “rate-and-term” refinance, trading an existing loan for financing of the same size but with a lower rate.
Until early 2022, rate-and-term “refis” were common, but then inflation and rising interest levels began to take hold.
Mortgage rates – which according to Freddie Mac hit a 2.65% historic low in January 2021 – topped 6.6% as of early 2024.
That would seem to be the end of the story. Trading a low-cost loan from the past few years for financing at today’s higher rates does not seem like a great refinance deal.
But wait, as they say on television, there’s more. There are other ways to refinance real estate besides a rate-and-term transaction, including options that make sense even though mortgage rates have increased.
According to the National Association of Realtors (NAR), property values nationwide increased 9% in 2019, 12.9% in 2020, 15.4% in 2021, and 10.2% in 2022. For the first six months of 2023, metro home prices were down .2% according to NAR – a decline, but nowhere near enough to offset price gains since 2019.
If you subtract mortgage balances from owner-occupied properties, homeowners have roughly $30 trillion in equity according to the Federal Reserve. Such equity has value.
For instance, it can be used to start a business, send someone through college, or pay off a major medical bill.
Homeowners can access equity with a cash-out refinance. One way to do this is by replacing an existing loan with a larger mortgage. In approximate terms, if you have a $150,000 existing mortgage balance and refinance with a $250,000 loan then you can leave closing with a check for $100,000.
Many borrowers, however, will be better off refinancing with a blended rate.
If you currently have a mortgage with a low-interest rate, it may be better to keep that loan and add a second mortgage. In other words, get your cash with a second loan rather than a rate-and-term refinance.
For example, you might have a current loan with a $150,000 balance at 3% that you keep. You then add a $100,000 second mortgage at today’s rate.
The blended cost of the two loans will be less than a new $250,000 mortgage at today’s higher cost. In addition, because you are borrowing $100,000 and not $250,000 in new financing, closing costs will be significantly reduced.
» MORE: See today’s refinance rates
Refinancing as a Competitive Financial Choice
The same forces that drove up mortgage rates also impacted other financing options. Just check the rates for credit cards, small business financing, and – starting in July 2023 – grad student loans.
There are also new forms of debt that are beginning to become more common.
According to a 2023 report from the Consumer Financial Protection Bureau, medical credit cards are now being sold to patients.
“Patients are typically offered these products in a medical provider’s office even when their insurance may cover the procedure or they qualify for a hospital’s reduced or no-cost financial assistance program,” explains the CFPB. It also found “interest rates often reaching above 25%.”
Rather than being saddled with super high-cost medical credit cards, many homeowners are better off with cash-out refinancing and its lower interest charges.
Mortgage Insurance, Refinancing, and the Double Dip
Homebuyers – especially first-time purchasers – routinely use mortgage insurance to buy real estate because it allows them to purchase with little down instead of the “standard” 20% upfront that lenders prefer.
Examples of financing with mortgage insurance include FHA loans with 3.5% down and conforming mortgages backed by private mortgage insurance with as little as 3% needed upfront.
Being able to own with little down is important. It allows purchasers with limited savings to buy today rather than in the future when prices may be higher.
However, there is a cost for mortgage insurance, a cost that can often be eliminated with refinancing.
For example, buy a home for $390,000 with 30-year FHA financing and pay just 3.5% down ($13,650). There is also a 1.75% upfront mortgage insurance premium, a cost that can be added to the loan amount.
Lastly, under the FHA program borrowers also pay a monthly mortgage insurance premium of .55%. That’s about $175 a month in this case, or more than $2,000 a year.
Borrowers today often have well more than 20% equity because of the rising home values seen since 2019. Owners with such equity should make sure that when refinancing an existing loan lenders remove unnecessary mortgage insurance fees, a nice little extra that shouldn’t be overlooked.
Avoid Fee Stuffing
Mortgage financing is a competitive field and it follows that borrowers can protect their interests by shopping. When you see strangely low rates, always check the lender’s offers for fees and charges.
The government requires that lenders provide a brief, easy-to-read, standardized loan estimate form borrowers can use to compare financing and refinancing offers.
There is much important information in these three-page forms, including the loan costs you can expect to pay at closing and overall costs during the first five years the loan is outstanding.
Use this information to get the best deals and avoid fee stuffing.