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January 19, 2021

When to Refinance Your Mortgage

Historically low mortgage rates in 2020 produced a rush to refinance. But while mortgage rates under 3 percent certainly generate excitement, choosing when and how to refinance requires not only keeping a close eye on rates but also a holistic approach to your finances.

“If you haven't refinanced in the past year or two years, you should consider it soon," said George Malak, a senior product manager with City National Bank in Los Angeles. "Mortgage rates are expected to hover close to 3 percent throughout 2021 and likely into 2022, although a major market event could move rates higher or lower at any time."

There are a variety of reasons people choose to refinance, including reducing their monthly payment, shortening their loan term or tapping their home equity to free up some cash.

Below are some of the top issues around refinancing that you may wish to discuss in 2021 with your lender, financial advisor and tax expert.

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Upcoming Life Events

Different life events, including your homeownership plans, are major factors to consider. Whether you plan to own your property for at least another decade or to sell within a few years will influence your mortgage choices and whether to refinance at all, said Malak.

If you're selling your home soon, a refinance may not be financially worthwhile because of the cost of refinancing.

But if you're preparing for other big changes, such as sending your children to college in a couple of years, you can use a refinance as a financial planning tool, explained Malak.

"You may want to lower your payments to improve your cash flow, or you may want to consider taking cash out of the property," he said.

Your Refinance Goals

You and your financial advisor should discuss why you may want to refinance and how to best take advantage of low rates to meet your goals.

For example, if you are nearing retirement age, you may want to pay off your mortgage or reduce the size of your payments, said Tzolere Abdollahian, a senior product manager with City National Bank in Los Angeles.

“Most people want to pay off their mortgage before they retire," said Abdollahian. “But there's also usually less desire to refinance when borrowers are near the end of their loan term."

On the other hand, a refinance can be a way to prepare for retirement, said Malak.

“Because rates are so low, you can refinance into a shorter loan term or into another 30-year loan with lower payments to get some breathing room for your cash flow," said Malak.

Costs

Closing costs vary by location and average between 2 percent and 5 percent, according to Bankrate.

“You need to consider how long it will take to recoup the closing costs of a refinance," Malak said. “If it's within 12 to 20 months, then it probably makes sense to refinance."

Some lenders offer to pay all closing costs, said Malak, but borrowers then pay a slightly higher rate for the entire loan term.

Deciding which route is best for your situation will require doing some math and comparing the various options.

Deciding Whether to Access Your Equity

Double-digit home price appreciation in some markets in 2020 added significantly to the equity homeowners may be able to access when refinancing.

“We're seeing lots of borrowers take cash out of their homes and keep their payment the same because rates are so low," said Abdollahian. “Cash-out refinancing can be a good option when someone wants the cash for a home improvement, tuition or for other expenses."

A home equity line of credit (HELOC) is another way to access home equity, particularly for homeowners who don't need cash immediately, she said.

“There are no payments with a HELOC until you actually use the money," said Abdollahian. “It can function as a safety net to allow you to access cash you may need in the future."

Choosing An Appropriate Loan Term

While 30-year fixed rate loans remain the most popular mortgage, refinancing borrowers often choose a 20-, 15- or 10-year term that enables them to pay off their loan faster and reduce the overall interest paid. You can compare loan payments and interest payments with your lender to decide the term that matches your financial plan.

“Keep in mind that when you refinance, your amortization starts again," said Malak. “If you have paid down your 30-year loan for many years, you may want to choose a 15-year loan for your refinance."

The rates on a shorter loan term are lower and you may end up with the same payment you have now while you accelerate your payoff date, he said.

Comparing Lenders

While borrowers sometimes compare mortgage rates from different lenders, it's also important to understand the differences between lenders who sell their loans to investors or offer limited loan products.

For instance, portfolio lenders like City National Bank keep their mortgages on their books, which gives them more flexibility with clients.

“At City National Bank we have concierge services that include a relationship manager and a residential loan consultant to provide advice to all our clients," said Abdollahian.

Qualifying for A Refinance

Refinance approvals are based on several factors, including the borrower's ability to repay the loan, the appraised value of the property and the loan amount.

“As portfolio lenders, we look at the big picture for our clients, not just their FICO score and income," said Malak. “We're accustomed to working with clients with complex financial portfolios."

The key to qualifying for a refinance, explained Malak, is to be transparent and ready to document all income and assets.

When mortgage rates are low, homeowners, real estate investors and owners of vacation homes may want to discuss their options with their lender and financial advisor to see how a refinance can fit into their financial plans.

City National Bank encourages you to consult with your banker, financial advisor and tax professional before making major changes to your financial situation. Need to discuss your wealth plan with an advisor and wish to find one? Get in touch with a City National advisor today.

You also are invited to keep up-to-date with the latest economic perspectives and shifting global markets during the pandemic by signing up for City National Bank's newsletters here. Delivered biweekly, straight to your inbox.

This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.

City National, its managed affiliates and subsidiaries, as a matter of policy, do not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisors on the tax, accounting and legal implications of actions you may take based on any strategies presented, taking into account your own particular circumstances.

Mortgage loans and HELOCs are subject to credit and property review and approval. HELOCs are not available in Texas. Additional terms and conditions apply. Not all applicants will qualify. All stated rates, terms, and discounts are subject to change without notice.

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