How do I know if it's a good idea to refinance?
October 21, 2015 10:21 AM   Subscribe

I own several houses which I rent out. I frequently get "pre-approved" offers to refinance the ones that have mortgages. How do I know if it's a good idea, and what's the best way to go about it?

I've refinanced before, but both times through the mortgage company my loan was already with. The terms of the refinances are frequently attractive, a hundred or so less per month, even keeping my current loan term, etc. Nevertheless, these offers come via junk mail and I am therefore wary.

Is it as simple as if I'm offered a better deal than what I've got, then cool? If they reach out to me with one deal, does that mean I can likely get a better one elsewhere? How do I do that?
posted by cmoj to Work & Money (7 answers total) 5 users marked this as a favorite
I've been able to get refinance mortgages with very, very good rates by going to the Zillow mortgage marketplace. You enter in the mortgage you're looking for, and some basic non-invasive information, and lenders compete for your business with quotes. You can also read reviews on each lender and see how they are rated by others. Make sure to select "advanced" on the mortgage search, then specify that it's for investment/rental property.
posted by dacoit at 10:28 AM on October 21, 2015

I just did this for the first time, so I'm interested to hear others' advice. Here's how I'd do it if I had to do it again: get all my materials together (taxes, pay stubs, last two bank statements, property taxes and insurance to be escrowed), take a morning off work, call five places, ask for quotes, decide on a place, lock in the rate, and get ready to move ahead.

It would help if you knew generally what was going on with rates, so I'd probably review charts of recent interest rate history to get a sense of it. For me, the first round of calls was followed by rates falling for a month, so when I called back a second time a month later, I knew I wasn't calling at, like, the year's worst moment to refinance. I'm not saying you should try to time the market, just get a general sense.

Before you call, think about how long until your next refinance or sale and your preference for low rates vs. low fees. I knew I was likely to refinance again soon, so I picked a slightly higher rate so that all my refinance costs would be covered. Having a slightly higher interest rate for a year would cost me less. YMMV. Most banks have access to the same rates, so try to quickly get a handle on what interest rate ranges are available to you for what price and which you prefer, then start competing on the mortgage lender fees.

After you pick a lender, prepare on about four rounds of two to three hour efforts: signing initial documents online, meeting the appraiser, reviewing the final loan documents they send you, and meeting with the notary. It takes about 30-45 days. Good luck.
posted by slidell at 11:02 AM on October 21, 2015

A general rule of thumb is that refinancing is generally only a good idea if you can knock a full percentage point off your interest rates. You'll have to make the savings worth it to cover your closing costs, et cetera. Check and other sources so you know where rates are generally.
posted by tckma at 12:10 PM on October 21, 2015 [3 favorites]

Another thing to think about is who is going to be servicing your loan? If you're happy with your current set up, do you want to risk ending up in a situation where you're not happy with the people you're sending money to every month?
posted by Bruce H. at 12:20 PM on October 21, 2015

That rule of thumb about a full percentage point is only for traditional loans that have closing costs. You can get a loan that has no closing costs, in which case you should just go ahead. We love because they give you an instant quote for several levels of closing costs. Further, they are a direct lender so they will not sell your loan. I've refinanced a couple times with them, though always a primary residence. You'll almost never get a great offer from your existing lender, because they're counting on you to stay put.
posted by wnissen at 12:29 PM on October 21, 2015

Use a refinance calculator, alternate one here.

What you want to look for is how long it will take to earn back the fees/costs of refinancing. Those costs may be rolled into the rate, so you need all the variables to compare apples to apples.

Then you can decide whether it's worth it to you, for a 1-year break-even or a 5-year break-even, for instance.
posted by Dashy at 1:19 PM on October 21, 2015

Generally speaking refis offer you a trade: in exchange for a fee, they will offer you a new duration / interest rate. You can refinance just to extend the duration, but you need a lot more sophistication than what you've demonstrated or what I can offer here. Generally speaking you want to refinance because market interest rates have fallen and you've previously borrowed at a higher rate.

At the most basic level, you compare the interest you'll pay on the rest of the current loan with the interest you'll pay on the new loan offered. If it's lower, you're interested in the deal, but if the fees charged for the new loan are higher than what you'd save you don't do it. You absolutely should shop around, and try to pick a diversity of lender types in said shopping, as some categories of lenders are more risk adverse than others.

More sophisticated analysis takes into account that you like money later less than money right now, and you need some discount rate to quantify how much less you like money later. Well capitalized firms have a low discount rate -- they have no better use for the cash. Individuals could have discount rates in excess of 30 percent. An alternative way of putting it is the break even analysis Dashy's calculator uses; it calculates how long until you're better off than you were before the refinancing.

Finally, you need to consider how likely it is you'll refinance again later. I.e., if borrowed at 5 percent last year, refinanced now at 4 percent, and rates fall to 3 percent next year, you'll regret it if the breakeven analysis showed 14 months. More realistically, it'll be like a quarter of a percent per year, and your breakeven might be multiple years. So you want some prediction of where the market is heading. Hint: all the weekly economic podcasts have a regular 5 minute section on when the Fed will start raising interest rates. It will not likely go lower without an exceptional international emergency, and may well go higher.

Oh, and refinancing is tricky in part because the above is a model using two variables: interest rate and discount rate. The contracts themselves can vary wildly and you should ensure when shopping around that the contracts you compare are all apples, so to speak.
posted by pwnguin at 7:59 PM on October 24, 2015

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