When Should a Client Refinance?

As a mortgage loan officer (MLO), you help clients to mortgage a new home purchase, but clients could also ask you for advice on refinancing. Being able to explain when the time is right to refinance is an important skill that will help your clients feel comfortable with the process.

Find Out Why Your Client Wants to Refinance

The first thing you need to know is why your client is thinking about refinancing. Homeowners typically want to refinance their mortgage because they want to:

• Reduce their monthly payment
• Take advantage of lower interest rates
• Shorten the amount of time it will take to pay off their mortgage
• Convert from an adjustable rate mortgage to a fixed-rate mortgage
• Use some of the equity they have in their home for other expenses

Review Their Existing Mortgage

Now that you know what your client’s goal is, you can look at the terms of their existing mortgage in order to give them the best advice. Some of the things you’ll discover include:

• Whether the rate on the existing mortgage is higher or lower than the current rate
• How much equity they have accrued
• If the mortgage term is 15 or 30 years

Next, review the client’s credit profile. Decide whether the client’s credit is good enough to make refinancing feasible.

Explain the Things to Consider Before Refinancing

Just because the client wants to refinance doesn’t mean that they should. They’ll be looking to you to explain how they should decide when the time is right to refinance.

Refinance When It Will Save Money

Your client may have an emergency that is prompting them to take equity out of their home. For example, they may need extra cash to pay medical bills. If that’s the case, they may need to refinance even if it doesn’t save them money in the short run.

If there is no emergency, the only good reason to refinance is if it will save your client money. You need to explain how refinancing works so that your client understands that they won’t always save money on a refinance.

For example, most refinance mortgages have closing costs just like their original mortgage. If the closing costs will be more than the savings of lowering an interest rate, then it may not be the time to refinance.

Consider Whether Mortgage Rates are Rising

Are mortgage rates are on the rise, but they’re currently lower than the client’s existing mortgage? It might be a good time to take advantage of the lower interest rate to reduce the amount of interest the client is paying over the life of the loan. It will also reduce their monthly payment.

This is only beneficial if the client plans to stay in the house long enough to “pay back” the closing costs and start saving.

Consider the Impact of Going from an Adjustable Rate to a Fixed Rate

Adjustable rate mortgages are often attractive to help clients afford the mortgage initially. However, if the current mortgage rates are at or below the interest rate on the mortgage, your client could save money by refinancing.

Consider the Impact of Reducing the Loan Term

If your client can afford the monthly payment that would result from reducing the term of the loan, it could be very beneficial to refinance to a shorter term. This would only apply if the client was planning on staying in the home for an extended period.

Explain How Refinancing Works

The paperwork required for a refinance is similar to what the client saw when they first financed the home. They may need an appraisal that they would pay for themselves. The lender would go through the underwriting process and decide whether to finance the mortgage just like the first time.

The only thing that is different is at closing. Rather than the payment going to the home’s owner, it goes to the lender holding the original mortgage. The original mortgage is paid off, and the refinanced mortgage remains in effect.

Refinancing is an issue that clients will raise throughout your MLO career. Using these tips to communicate with your client easily is one of the skills you’ll need to ensure your success as an MLO.