Interest rates are so low right now, that I’ve been fielding A LOT of questions lately about whether or not a owner’s should consider refinancing. Here’s a wonderful post I recently found on the Keeping Current Matters blog by Dean Hartman on the subject. Here are a few of the issues to consider as you (and all of America) contemplate a refinance:
1. Does it make financial sense?
If you are considering a “rate/payment reduction” refinance, I typically recommend that people do one simple calculation. Divide your monthly savings into the costs (out-of-pocket expenses AND any increase in your principal balance). That number will tell you how many months’ payments it will take to “break even”. Depending on how long you anticipate staying in the home, and comparing that to your “break even” month, will give some clarity to what is the right decision.
2. What about a refinance to shorten the term of a mortgage?
When examining the possibility of cutting years off your mortgage, you should take a good hard look at how such a move can affect your monthly cash flow. If your payment stays the same and you save a few years of payments, many people will choose that option (rather than the monthly savings of a “rate/payment reduction” refinance). However, if your payment is going up (in order to save years), take time to analyze the impact on your monthly activities. Will you be sacrificing too much to save payments 20 year from now?
3. What will my home appraise for?
This is the biggest challenge facing most people. With so many homes underwater, there are many people who won’t be able to refinance. If you have an FHA loan, there is some hope if you qualify for their “Streamline Refinance Program” because there is an option to close the loan without an appraisal. (For a 15 minute video explaining the program, go to www.Facebook.com/FHAStreamlineRefinances) For others, loan-to-value issues can create the need for Mortgage Insurance when it didn’t before (making “savings” harder to achieve). Understand that most lenders require you to pay for an appraisal (and maybe an application fee too) when you submit your loan request, so do your best to have a real sense of what your home will appraise for.
4. Should I lock in?
Even though conventional wisdom is that rates are likely to stay low for a while, history has shown that when they do go up, they go up quickly and dramatically; therefore, my advice is that if you like the rate you are quoted, lock it and sleep well.
5. How will my income and credit be looked at?
Your refinance creates a new loan that will likely be bundled and sold in a new mortgage-backed security; therefore, this new loan will be underwritten to today’s guidelines (which are tighter than they were a few years back). What I am saying is, you may have gotten a loan in 2006, made every payment on time, and still not get approved today. Maybe because, you have a “no income check” loan and your tax returns won’t support your stated income. Or maybe because you bought a car and your ratios are a bit higher. Or your FICO score is different. Or your appraisal is insufficient.
The most important thing is to speak with a solid mortgage professional and try to address any hurdles BEFORE you spend your money. Compare the proposed savings; honestly assess your home’s value; review your income, assets and credit; all ahead of time to improve the likelihood of a desired outcome.
