If you work at a title agency, you’ve likely noticed that refinancing has become very common among homeowners in recent years. In fact, the number of people who refinanced in 2020 was nearly double the number from 2019. That’s all thanks to interest rates dropping suddenly, encouraging homeowners to look into different refinance options.
Though rates are gradually on the rise since then, they’re still historically low compared to recent years, so refinancing this year can benefit many homeowners. If you’re looking for ways to help the homeowners who are coming to you with questions about refinancing, check out resources that can give you and your clients some guidance before you point them in the right direction toward a mortgage partner.
If your clients are on the fence about refinancing, you should let them know the advantages of this increasingly common mortgage move before you refer them to a mortgage broker. The following are some of the main benefits of looking at different refinance options right now.
Mortgage interest rates are lower than they’ve been in years, which is the main reason homeowners have been refinancing since 2020. Depending on the interest rate your clients currently have, and what they’re approved for, they can save hundreds of dollars per month by looking at the different refinance options.
Due to rising home values, many homeowners now have a lot of equity in their house that they didn’t have a few years ago. If they need a lump sum of money now to make a big purchase, pay for their child’s college tuition, or simply pay the bills, a cash-out refinance may be helpful.
The most common mortgage term is a 30-year loan, but homeowners can refinance to a shorter-term if they’d like. Refinancing into a 15-year loan will increase their mortgage payments, but it will save thousands of dollars in interest since they’ll be done paying off their home in half the time as they would with a 30-year loan. On the other hand, if they have a 15-year loan and are struggling to make payments, they can refinance into a 30-year loan to lower their monthly bill.
If your homeowners currently have an adjustable-rate mortgage (ARM), they likely benefited from very low-interest rates—leading to low mortgage payments—for the first few years of the loan. But once the fixed-rate period is over, the interest rate causes payments to increase quite a bit, making the house unaffordable for many homeowners. This is why your clients might want to refinance the loan, so they get a fixed-rate mortgage while interest rates are low. This way, they can lock in the current rates and won’t have to worry about them increasing like they would with an ARM.
These are the most common reasons to refinance right now. If any of these apply to your client, you should help them explore their different refinance options. Make sure they know not only the benefits of refinancing their home loan, but also the requirements they’ll be expected to meet. Then you can refer them to a mortgage partner to begin the refinancing process.
Refinancing comes with many advantages, but it also comes with a price. More specifically, this process will take time and money up front, and some homeowners will find that they can’t spare these resources right now. This is why you should give your clients an idea of what they’ll need to provide—from important documents to money for closing costs—before they get started.
For instance, you should ensure they know they’ll need a good credit score to refinance, just as they did to buy a house. The minimum score they’ll need depends on the loan program they’re going to use, but it’s usually 620. To qualify for the lowest interest rates, though, it will need to be 720 or higher.
They will also need to have a low debt-to-income ratio, typically under 36%. If it’s higher than that, they might need to pay down their debt before they can qualify for the different refinance options.
Additionally, they’ll need home equity to refinance. Most lenders require at least 20% of home equity. To help your clients figure out their percentage, use the loan-to-value ratio (LTV), which divides the mortgage by the home’s value. So if the house is worth $200,000 and the mortgage is $120,000, the LTV is 60%. This means the client has 40% equity, which should be more than enough for a lender to refinance their loan.
Finally, your clients will need to think about their closing costs. These are made up of several smaller fees that pay for the application, appraisal, inspection, title search, etc. They usually cost 3% to 6% of the mortgage principal, which adds up to $5,779 on average in the US. While your client’s closing costs may vary, be sure they’re prepared to pay at least a few thousand dollars upfront.
Once you let your clients know about the advantages and requirements of the different refinance options, you can decide together if it’s worth it for them to go through with this process. In most cases, it comes down to the numbers. Namely, will their savings exceed the closing costs to refinance?
You can help them decide this by doing the math with them. This means determining the break-even point where you calculate how long it will take them to see some savings after refinancing. You can do this by dividing closing costs by the amount they will save every month.
For example, if the closing costs equal $5,000 and your client will save $250 per month, dividing the first number by the second gives you 20. This means it will take 20 months for your client to recoup the costs of refinancing.
As long as they plan to keep the house longer than that, most homeowners would be happy with this break-even point. But if they plan to sell in a year, it likely won’t make sense to refinance. Going through these calculations with your client can help them decide on the best route to take with their mortgage, at which point they can speak to a mortgage broker to get started.
The bottom line is that if your clients have expressed interest in learning the different refinance options, let them know they’re not alone in this process. As a title agent, you don’t have to help them through the steps to refinance, but you should make it clear that you know the basics about this process and can point them in the right direction to get started.
So make sure your clients know that you’re knowledgeable about refinancing and care that they get the results they’re looking for. You can do this by being available to answer their questions, researching the refinancing programs available to them, and giving them access to the resources they need before referring them to a mortgage broker.
This could be as simple as calculating their break-even point with them—or at least sending them a refinance calculator that will help. It could also involve guiding them through the process of paying for closing costs using a secure digital platform like paymints.io. When you use our electronic money transfer platform for closing costs on a loan, you and your clients can rest assured that the payment will be sent securely and quickly on closing day. To learn more about our platform, contact us to schedule a demo!