Refinancing in a Volatile Rate Market – Get the Facts First
Mortgage rates hit 16-month lows in mid-October, spent three weeks slowly inching up, and have now dipped back to those lows.
Rates rise and fall when bond markets sell off or rally, respectively, based on how they interpret daily economic news and data. This rate volatility will continue as the Fed winds down its six-year rate stimulus campaign.
If you understand the loan process, you can capitalize on rate volatility by capturing the lows when they come. Ask your lender the following five questions to align your loan process with this volatile rate market.
1. Did I miss the mini refinancing boom of 2014?
No. Rates are low enough that the mini refi boom from mid-October could resume. But with economic uncertainty driving rate markets up and down daily, you must have a plan. You can’t just lock a rate when they dip and hope your loan closes on time (see #5 below).
The best approach is to contact a lender if you’re considering refinancing. Taking this step ensures you will have the loan process underway, with a rate lock being the last thing you’re waiting for. Then you can set a rate target with your lender based on short- to medium-term rate market expectations, and give your lender a standing order to lock the rate when they see it during volatile daily trading.
2. How do I get accurate rate quotes without submitting all my documentation?
As you begin your loan process, you can find out exactly what lenders are quoting by submitting a custom loan request on Zillow. However, it is important to note that once your credit report is run and your financial and property documentation information is collected, any changes or updates to your original loan request can affect your loan amount and mortgage rate.
Additionally, a lender will analyze whether the math supports paying points on a refinance given your objectives—paying 1 point (which is 1 percent of your loan amount) should lower your rate by at least .25 percent. In this case, the interest cost savings from the .25-percent lower rate repays the cost of the point in four years, and everything from that point forward is pure benefit from the lower rate.
You should also work with your lender to determine whether a cost or no-cost refinance is better for you financially. Refis cost about $2,500 to $4,500 depending on your market, and your rate will be .125-percent to .25-percent higher if you choose a “no-cost” refi. Knowing this, you can prepare for a lender consultation by analyzing cost vs. no-cost refi options in advance.
3. Why should I submit my documents as soon as possible?
Your lender will need to pull your credit report, monthly debt, pay stubs, W-2s, tax returns, asset statements, and anything else impacting your financial profile such as promotions, career changes, job gaps, maternity leave, loans you’ve made or received, and income or debt from divorces.
Your loan officer will have to collect and analyze these documents, which an underwriter at the bank will then have to approve. An appraiser must inspect your property, then submit a full report for the lender to review, along with a title report, insurance, and any other relevant property information (such as a full questionnaire, budget, bylaws, homeowners association rules, and Articles of Incorporation if your property is a condo).
If you start the loan process early by submitting your application and required documents, you can avoid unpleasant surprises or adjustments before you lock a rate.
4. What if rates drop after I lock my rate?
You have options if this happens. Whether you’re locking a purchase or a refi loan, rate markets will move up or down after you lock your rate.
If rates rise, your lock protects your rate as long as your loan closes within the rate lock period (see #5 below).
If rates drop, ask about your lender’s “rate renegotiation” policy. Most lenders follow a model similar to this: If rates drop at least .25 percent, you can renegotiate your rate to capture about half of that drop. So if you locked at 4.125 percent with a lender that followed this type of model, and rates dropped to 3.875 percent, you could renegotiate your rate to 4 percent.
5. Will my loan close before my rate lock expires?
Ask your lender if their quoted rate allows enough time to close your refi given all factors of your profile and their bank’s “turn times.” It’s important to know refinance loans in a rate-fueled market don’t close as fast because lenders will always put their purchase loans ahead of their refis in line for approval.
Be sure to ask your lender about their lock extension fees, and make them clarify who pays the extension fees: you or them? Lock extension fees range widely. They can be .125 percent of the loan amount for 15 extra days, or .125 percent for 5 extra days. On a $250,000 loan, that means a 15-day extension could range from $312.50 to $937.50.
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