Quoted on Motley Fool on When You Should Refinance and How Often You Should Refinance Your Mortgage

Recently the personal finance site Motley Fool asked me to answer some questions related to refinancing mortgages. Following are my responses.

When should someone consider refinancing their mortgage?
The simple answer is whenever the savings in interest rates reasonably offset the closing costs of a new mortgage. However, there are other reasons to refinance even if you cannot get a better interest rate. If you have a variable rate on your mortgage, your mortgage payment may go up if interest rates rise. Refinancing with a fixed rate mortgage will eliminate this risk. If you have paid off some of your mortgage, refinancing should reduce your monthly payment and leave more cash for vacations or living expenses. This option is a good option for someone whose income is not expected to increase (people living on some sort of fixed income). Finally, if you have equity in your home, you could refinance and take out cash for home improvements or investments, such as buying a rental property.

How often should someone refinance their mortgage?
You should refinance your mortgage when rates fall below the rate you are paying, but what if rates keep falling? Should you keep refinancing? That is not an easy question to answer because when you refinance you may get a better interest rate, but refinancing costs money. There are appraisal fees, closing costs, title fees, escrow fees and sometimes points. All these charges can add up to thousands of dollars. Also, when you refinance there is a good chance your credit score will drop, as “new credit” and “credit inquiries” are two things that negatively affect your credit score. If you need credit for anything else, such as a car loan, bathroom or kitchen remodel or anything else that is paid with consumer credit, you may find you will be charged a higher rate of interest in those loans. Also, when you do refinance the underwriter wants to see your previous loan “seasoned” which means you have made the payments on time for a certain period. Depending on the underwriter, that could be anywhere from six to twelve months. If you apply to refinance too soon, you may not get as good of an interest rate as you hoped.

What are some tips for people wondering how to refinance their mortgage?
I have refinanced properties with dozens of lenders and mortgage brokers over the years. I’d love to tell you there is some secret to make applying for and getting a mortgage easier. If there is, I haven’t found it. But to the degree you can make it a little easier, there are some things you can do. First, have your paperwork ready. The lender is going to want tax returns, pay stubs, bank statements, 401K account statements, mortgage statements, brokerage account statements and possibly more. Download electronic copies of all these documents so when asked, you can quickly upload them or email them to the lender. Second, check your credit report. The lender will want you to explain any negative aspect of your credit report and any credit inquiry that has been made recently. Third, when choosing to use a lender or mortgage broker, don’t be fooled by all the low interest rate ads. The interest rate you are going to pay is based on the underwriter’s assessment of your risk. I have an excellent credit score, excellent credit history, low amount of debt, good income, and reasonably high net worth. Yet I’ve never been able to get those rates they advertise. Finally, think about your style. Are you okay doing everything online and talking to whoever in the call center answers the phone or do you want a specific person handling your transaction whom you can reach out to with questions or to help you through the process?

You can find the original post of the Motley Fool’s website by going to: https://www.fool.com/the-ascent/mortgages/best-refinance-lenders/ and scrolling down to the section headed “Mortgage Expert Advice.”