When interest rates fall, you may want to refinance your mortgage. But can you explain what you hope to get out of refinancing?
“If you want to refinance, I say, ‘Well, what do you want to do? What do you hope to accomplish by refinancing?'” says Carolyn Morganbesser, assistant vice president of mortgage originations for Affinity Federal Credit Union in New Jersey.
To get the refinance you want, you need to explain your goal in words that the lender understands. This is a guide to what to say, complete with sample sentences that you can use as you kick off a refinancing conversation with a loan officer or mortgage broker.
If and when you refinance, you’ll have company. Let’s say 30-year mortgage rates linger around 6.125% for a while. In that case, almost 5 million homeowners would be in a position to cut their rate by at least three-quarters of a percentage point, according to Intercontinental Exchange, a mortgage data analytics company.
A refi isn’t a Whopper
Applying for a refinance isn’t like ordering a burger, where you get what you want, no questions asked. An ethical lender turns the request into a discussion.
Jim Sahnger, a loan officer for C2 Financial Corp., in Jupiter, Florida, says he asks, “If I could design a refinance that is outstanding for your situation, what are the top three things you’d like to see come out of it?” Maybe it’s cash flow, or maybe it’s money to pay off debts with higher interest rates.
Morganbesser says she tells clients to talk to her candidly, as if she were a priest or bartender: “I’m not here to judge anybody, nor is any loan officer. We’re here to help you.”
Be prepared to be challenged. Lou Barnes, a retired mortgage loan officer who worked for decades in Colorado, had advice for employees he trained: “Always be prepared to disagree with the client’s intentions and ideas, which are often wildly wrong.” It’s like talking to a car mechanic. You might think you’ve identified the solution to your problem, but what if you’re wrong? It’s the expert’s job to advise you, even when you disagree.
To save time, it helps to come to the conversation with vital information about the loan, including your mortgage interest rate, the amount you owe, the amount of your monthly payment, and the breakdown of the monthly principal, interest, taxes and insurance.
Here is a list of common refinancing scenarios and how to talk to a lender about them.
Simply reducing the monthly payment
The simplest refinance is called a rate and term refi. You replace your mortgage with a lower-rate loan for the same term, or loan length. For example, swapping a 30-year loan with another 30-year mortgage. The goal of a rate-and-term refi is to reduce the monthly payment.
Sample sentence: “I want to do a rate-and-term refinance to reduce my monthly payment.”
The lender might ask you what you plan to do with the monthly savings. Pay off debts? Save for retirement? Have fun? And the lender might ask if you would prefer to start all over with a 30-year payment period, or if you would prefer to keep the original loan’s payoff date, while paying a bit more every month.
If you want to keep the same payoff date as the original loan, say, “I want to amortize (AM-ur-ties) the new loan so it has the same end date as the old loan.”
Refinancing while turning equity into cash
With a cash-out refinance, you borrow more than you currently owe. You take out the difference in cash. It’s your money, so you can spend it however you want. But it’s often used to pay off higher-interest debt, such as credit cards and home equity lines of credit. The classic goal of a cash-out refi is to reduce your total monthly debt payments.
Sample sentence: “I want to do a cash-out refi to pay off my medical debts.”
The lender might ask how you will avoid running up additional debts.
Getting rid of mortgage insurance
An FHA loan is a mortgage insured by the Federal Housing Administration. In most cases, the only way to stop paying monthly FHA premiums is to build at least 20% equity, then refinance into a conventional mortgage.
You have a couple of choices if you have a conventional loan with private mortgage insurance, or PMI. After you have at least 20% equity, you can keep the loan and apply to cancel PMI. Or, if you can capture a lower interest rate, you can get a two-fer by refinancing into a lower-rate loan without PMI.
Sample sentences: “I want to refinance out of my FHA loan and get a mortgage without mortgage insurance.” “I want to refinance to a lower rate and get rid of PMI at the same time.”
Removing a co-borrower
When couples buy a house together, they often put both their names on the mortgage. Some couples later split up. When they do, they often want to take one co-borrower’s name off the mortgage. This is accomplished by refinancing the loan.
Sample sentence: “I want to refinance to get my ex’s name off the mortgage.”
Moving from adjustable-rate to fixed-rate or vice versa
An adjustable-rate mortgage starts out with a low introductory rate that lasts a few years, usually five or seven. Then the rate is adjusted every six months after that. When the rate goes up, the monthly payment goes up, and when the rate goes down, the monthly payment goes down.
Some ARM borrowers insulate themselves from twice-a-year rate changes by refinancing into fixed-rate mortgages. The stability of a fixed rate makes financial planning more predictable.
On the other side of the ledger, some homeowners reckon they’ll sell within a few years. They refinance from a fixed-rate to an adjustable-rate loan to take advantage of the lower rate, while planning to sell before the first rate adjustment.
Sample sentences: “I want to refinance out of my ARM into a fixed-rate mortgage.” “I want to refinance into an ARM because I plan to sell the house in four years.”
Changing the loan’s term
Finally, some homeowners look at the 27 years that are left on their 30-year mortgage and think, “Why not refinance to a 15-year loan to pay it off faster?” Moving from a 30-year to a 15-year loan is called shortening the loan term.
You can save tons of interest over the life of the loan by refinancing into a 15-year mortgage. And the interest rate on a 15-year loan will be lower than on a 30-year mortgage. Those are the upsides.
The downside is that the monthly payments are higher on a 15-year loan, even if the interest rate is lower. Those higher monthly payments can strain your finances if you rack up unexpected expenses. And they leave you with less money to sock away for retirement.
If you’re determined to pay off your mortgage quicker, the lender might recommend that you pay extra each month instead of refinancing into a 15-year loan.
Sample sentence: “I’m thinking of reducing my loan term. Can you step me through the pros and cons?”
