Articles by Topic, Finance, General, Mortgages

When is it time to refinance your home mortgage? or, Are the Mortgage Rates Ripe for a Refinance?

Are the mortgage interest rates near historical lows? Could today’s rates be close the lowest that any of us have ever seen? Guess what, they are. What can this mean for those of us who are worried about the economy and our own financial future? There is an opportunity for home owners and investors to save money on their mortgages. This is also an opportunity to save money on a mortgage for a new purchase. Did you know that a 1% change in rate can increase (or decrease if the rates go up) your purchasing power by 10%.

So what about a refinance? When is it time to refinance? There is the old tale of needing a 1% reduction in rate for a refinance to make sense. Could this be true? NOT! Sorry, I learned that from my kids.

There are many things that can make a refinance good or bad. The key factor is the “Recapture Period”. How long will it take to recapture the cost of the refinance through the “savings in interest rate”? This quote is very important. A sales person has the capacity to make a bad refinance look like a good one. If you look only at the reduction in monthly payment you not be getting the whole story. The re-amortization of a mortgage could save you hundreds of dollars in cash flow but not really save you any money through true savings on the new rate. Mortgages are re-amortized when they are refinanced. This means that if you are 8 years into a 30 year fixed rate the payment could be reduced significantly by the addition of another 8 years of payments without having any significant savings in interest rate.

So how can you really know if you are getting the good deal on a refinance? Can you really trust your salesperson loan officer? That is a hard question to answer. If you know the right questions to ask you will be able to find out exactly how much you are going to save on your refinance. I’ll bet you are thinking “Sure buddy, what are the questions?”. Here we go.

1. What is the recapture period of this refinance? This tells you how long it will take to recoup the upfront costs of the loan through the interest savings, not the savings in cash flow from a lower payment. This is important even if you roll all of the costs into the loan. When rolled into the loan they are still real and it is money spent. There are times when a lower payment is sufficient reason to refinance.

2. Always ask what the recapture period is with points and no points. When paying points the industry standard is 2.0%. Please remember that Origination fee, Points and Discount are all the same thing. They are fees that the borrowers pay to get a lower interest rate.

3. What is the benefit to you if you do pay points? Does it increase or decrease your recapture period? Does the payment of points put you into a higher loan to value that could increase your interest rate or mortgage insurance?

4. How long do you think you will be in the house? If you are not sure about how long you want to stay you could be throwing thousands of dollars away. I would recommend that you have a plan to stay in the home several years beyond the recapture period.

5. If everything looks good at this point it is time to look at future financial needs. A refinance is a great time to get some cheap money for projects, new vehicles or possibly a rebuild of an older vehicle. I have even seen people us this opportunity to pull some cash to max out their retirement accounts for the year. I call this forced savings as you will now have to make payments on this money that you “Saved”.

This is all great information if used. Going back to the beginning of this blog, remember the interest rates are great right now. If you are not sure where to start try your Realtor. Realtors rely on reputable lenders to help them get buyers into houses. These same lenders can help you evaluate your refinance potential. Most lenders can tell you if you are in a good position to refinance with a simple 5 minute phone call. I hope that you found this information helpful . If this saves one person from getting a bad deal I will be happy. Sincerely, Jack DeCook Sr. Home Mortgage Consultant. Please feel free to give me a call for a free recapture analysis.

“An opportunity is never lost, it is simply found by someone else” Benjamin Franklin