No matter how uncertain 2020 has been so far, opportunities abound. And right now, refinancing your home loan seems like one of the more attractive opportunities for many Utah residents looking to save money effectively.
It’s not hard to see why. Refinancing your home loan frequently means lower interest rates and a much more foreseeable term limit to your mortgage. Who wouldn’t jump at the chance to pay off a 30 year mortgage in just 15 years at a much more accommodating rate?
Not everyone. In fact, for many Utah residents whose monthly income is currently far from stable, refinancing a home loan isn’t just unrealistic. It can sometimes actually put you in danger of foreclosure. Before you decide to jump at the chance of refinancing your mortgage, here’s what you should know first.
Why Refinance Your Home Loan?
Chances are, the terms of your mortgage weren’t exactly ideal when you first purchased your home. Particularly if you were a first time buyer. And that’s largely because lenders take a certain risk when approving first time buyers. It’s not necessarily that they’re mistrusting you. But a mortgage can essentially make or break your credit, and banks need some form of assurance that the former will most likely be the case.
In theory, simply refinancing a home loan seems like the smart thing to do. After all, refinancing to a 2.5 percent interest rate is certainly better than 3.5 percent or higher! And it can be—assuming that you’re eligible.
Mortgage rates reached a historic low of 2.50 percent for a 30 year fixed mortgage in August of this year, in comparison with the 4.54 percent reported in 2018. And refinancing plans jumped by close to 78 percent in 2019, helping to drive both the increase in home loan originations as well as the current decline in interest rates. That’s great news for the real estate market. At least, for now. There’s just one catch.
The average credit score for most Americans is just slightly above 700. Normally, that’s considered a good score. And historically, most lenders have insisted on a bare minimum score of 680 for homes with less than 25 percent equity. But 2020 has been anything but normal. Lenders are fully aware of the dip in current rates, with some predicting they’ll continue to fall to unprecedented lows. The result is that it’s far more common to find a bank insisting on a minimum credit score of 720 for refinancing (sometimes, much higher) than it is for the historic minimum of 680.
And unfortunately, your credit rating won’t always take into account factors resulting from the COVID-19 pandemic.
4 Reasons Why Mortgage Refinancing Loans Are Rejected
- Insufficient funds for downpayment and closing costs. Both your income, your monthly bills and your prospective financial stability will be carefully reviewed by a lender when refinancing a loan. If your current and future financial status doesn’t meet the minimum criteria of a bank, your application is likely to be flat out denied.
- Your debt to income (DTI). Homeowners frequently apply for refinancing in spite of carrying a substantial amount of debt. And if your monthly debt is higher than approximately 36 percent of your income, you’re likely to be viewed as a significant credit risk for refinancing your home loan.
- A decline in your credit score. Many homeowners consider home loan refinancing options as a result of sudden emergencies or loss of income. Unfortunately, both can have a detrimental effect on your credit. As we indicated, many lenders will only approve refinancing for homeowners with a stellar credit rating in 2020; and most banks consider the average score of 703 substantially less than stellar; not exception, not very good, but just “good”.
- Low appraisal. Most lenders will insist on a reappraisal of your property when refinancing a home loan. And if the appraisal turns out to be lower than the actual property price (either as a result of market changes or everyday wear and tear), the loan to value ratio (LTR) cannot be legally approved by a lender.
4 Reasons Why You Might Not Want to Refinance
Some of the factors of why home loan refinancing applications are rejected may not be applicable to you. But what if the opposite is true? What if you not only have great credit but your property value has actually increased? Wouldn’t refinancing be the smart thing to do? Maybe refinancing is something you want to do to tap into the equity of your home? Good ideas?
Yes… and no.
First, Interest rates may be at an all time low right now. But it’s critical to take into consideration how long you’re going to stay in your home? If you are planning on staying in your home for usually longer than 3 to 6 years that will give you enough time to recoup the closing costs you paid to refinance.
The 2nd thing to be aware before you consider refinancing your current mortgage is to know the difference between your loan rate and your loan APR and make a decision to see if it’s worth it for you?
Your loan rate could be a fixed or variable 2.5% but your actual APR (Annual Percentage Rate) can sometimes be almost one percent or more in addition! The loan APR takes into account the other costs that you pay to refinance such as closing costs & other fees. So when you see that your rate is 2.5% but your APR is 3.4% that means you are actually paying that higher rate because of the costs you had to pay to make the refinance work. In other words, refinancing is not free!
When you compare your current APR to the cost to benefit/savings rate of your new loan it may not be worth it. It’s best to consider refinancing when you can gain at least 1% to 2% or more reduction in rate.
Third, closing costs can be expensive! You’ll be charged loan origination fee, underwriting fee, title fee, appraisal fee many times, and other broker fees. Separately, they might seem minor at first. But collectively, they can make up a percentage cost that’s less than ideal. And as of late August? The upfront costs of refinancing a home loan in Utah can reportedly be between $6,000 to $12,000.
And 4th, is to be aware of the future interest you will be paying on your loan if you roll the closing costs & fees into your loan.
Your closing costs will have to be either paid out of pocket by you at the time of closing, or rolled into your refinanced home mortgage loan. And when you do the math, rolling your closing costs into your loan to be paid off over 15 to 30 years ends up being a heck of a lot more than $6,000 to $12,000 because you’re paying interest on top of that over time.
Is Selling Your Home A Better Option Than Refinancing?
Priorities change. Emergencies occur. And if you’re one of the 4.5 percent of Utah residents who have had to claim unemployment since July of this year, freeing up some of that home equity is more critical than ever.
Eligibility for refinancing can depend on any number of factors, from your credit to your current job stability. And if you plan on staying in your home for the next 6 years or more, refinancing your mortgage can certainly be a viable option for you and could make financial sense.
Sadly, you may not be in a position to refinance your mortgage or tap into your home equity. No one wants to leave their home, but the reality is that many of us have been forced to. And the reality is to find a way to immediately access your home equity by selling your home.
The problem is that selling a home is not always so “immediate” going the tradition selling route of listing your home with a realtor or even selling it FSBO.
At Gary Buys Houses, we provide an immediate solution that can both keep you in your home if needed as well as provide instant relief for cash flow dilemmas. It’s called our “Sell Now, Move Later” program. We’ll purchase your home as is at a price that’s fair; often in as little as 3 – 5 business days. You can continue to stay in your home as long as you need, with the option of repurchasing once your circumstances change for the better.
Ultimately, your decision to refinance your home loan or sell your home is entirely up to you. And refinancing can certainly work in your favor if you’re eligible for it. Just make certain your decision is an informed decision before you wind up signing the dotted line.