Refinancing - When and Why?

The first rule is that there are no rules. You should refinance if it makes sense for you. The "Rule Of Thumb" used to be that if you could lower your interest rate by 2% or more then you should refinance; Depending on your situation, it may make sense for you to refinance even if you can lower your rate by only 1/2%.

It's time to seriously think about refinancing your current mortgage, especially if your interest rate is 7.5% or higher. Rates are dropping in the shadow of our weakening economy, and rates are the lowest they have been in years.

Refinancing lets homeowners reduce their monthly payment, slash thousands of dollars off the total cost of the loan, and even arrange "cash-out" refinancing if they want to pocket some extra money to be used for any purpose. Buy a car, pay off a car, credit cards, student loans, whatever! It makes sense to refinance if you can recover your costs and make a fair return on your investment before you plan to sell your home or pay off your mortgage. We can help you calculate what your refinance break-even point is.

Many times, the savings may be obvious. For example, the borrowers were going to save over $15,000 over 48 months.

A more typical case is one where there is a closing cost of, say $4,000, and a saving of $150 a month with the new loan. If you can get your cost back within three years, you are going to be in the house at least that long, and have lower payments thereafter, then refinancing definately makes sense for you.

Here you will find information relating to refinancing an existing home loan. We are truly dedicated to finding the right loan to suit your needs. A key to finding the right loan is having the available resources to make informed decisions.

I regularly see these situations that call for refinancing:

1. If you have a fixed rate loan and can refinance into a similar term loan at a lower rate, you should refinance. From my perspective: if I can wave my hands at your 30 year fixed rate mortgage and lower the interest rate, then you are foolish not to do it. Some people say: "Yes, but I have been paying on my 30 year loan for 5 years and you want to replace it with another 30 year loan. This is going to cost me more in the long run". This is not correct. You can, in this situation, still pay the loan off in the same 25 years and be making a lower payment on your new loan than your old one. We will calculate the payment necessary to pay it off in 25 years. Plus many times, with the lower rate, and lower payment, although you may go back to a 30 year term, your "total" cost over the life of the loan may still save you money.
2. You have a 30 year loan, with over 20 years left. Many many times we are able to refinance these loans into 15 year terms while leaving the payment very near your 30 year payment. This is an obvious no-brainer, as the amount of money saved typically is in excess of $80,000, plus shaves YEARS off your loan. This is also the most frequent reasons people refinance.
3. You have an Adjustable Rate Mortgage that is about to increase in rate but you are not pleased with where fixed rate mortgages are. You should look at a 1 year Treasury ARM and see if you can keep that same index and margin and "roll back" the rate for a year. This is a "no risk' proposition which in essence this gives you a break for exactly 1 year. During this time you should stay in touch with your lender to decide what to do during that year. I do this for a large number of my customers. I also regularly update my customers who have ARM's.
4. You have an ARM and your nerves can't take it any more. You simply want the certainty of a fixed rate loan. Here the key is to recognize that fixed rates are "bouncy" and you want to lock your rate at appropriate time. This is 50% skill, 50% luck.
5. You have a "balloon loan" that needs to be refinanced. Here, you need to discuss your situation with us. You may want fixed. You may want adjustable. The correct choice of loan depends on the market and most importantly, on your situation.
6. You need "cash-out". You may want an equity second or a new first. This depends on the relative size of your first and the cash out. Equity lines issued by direct lenders have low cost but high rate. You again have to discuss your exact situation with us, as we may have some costs, but a better rate.
7. You currently have a first and second mortgage. Banks love giving people second mortgages. Unfortunately, many of those people would have been much better off getting a new first mortgage instead. Lot's of people THINK a second would be better for them because their first (for example) might only have 18 years left. I regularily refiance people out of a first & second mortgage into a new first mortgage which saves them $100's each month while still paying off their loan in the time frame they want. Call today. I'll analyze your situation to see if a refinance makes sense for you.

What NOT To Do

There are a lot of things "not to do". I will point out 3 common mistakes I see people make.

1. Setting an unrealistic goal. I always get inquiries from people who say something like, "I have a 30 year fixed rate Jumbo loan at 8.625% and I will refinance ONLY when rates get to 6.0% at no cost". Sometimes I call people back and say, "Why 6%? why not 5% or 3%? They say, "Well rates are not going to go that low". Right and they are unlikely to go to 6% at "no cost" also ("no cost" loans typically cost anywhere from 1/2% to 1% higher than the going interest rate)

   You should first succumb to the fact that once you can lower your rate with no out of pocket expense, you should probably refinance. Don't draw unrealistic interest rate lines in the sand. They get blown away too easily.

2. The "Once rates start dropping, they are going to continue to drop and I'm smart and I am going to lock when rates hit the bottom of the market" syndrome. It is very hard to guess the interest-rate cycle, and pretty hard to catch the bottom. Remember that rates can rise fairly quickly.
3. "If the rate goes down just another 1/8th percent, then I'll lock" This one just kills me! I see people lose all the time over this theory. If your current rate is 8.25% and todays rate is 6.875%. LOCK & CLOSE! Most people have what I call "interest rate block". They get a rate stuck in their head, and that is the rate they want, no matter what. Most people fail to realize (and most loan officers fail to show them), that the difference on the average loan over 1/8th a percent is usually less than $15 per month. If you can save $150 per month on your loan at today's rate, why gamble? Why hold out for another $15 when the odds are against you?

Don't get piggy. Work with us. Set a goal and lock when it gets there. Are we going to hit the bottom? Probably not. Are we going to save you money? Yes. If you can save money with no out of pocket costs, than you have nothing to lose. If you want to gamble go to Las Vegas. It's a heck of a lot more fun

Extra Tricks to Save Money When Refinancing

The purpose of most refinance loans is simply to save money. The goal is to minimize your expense over the life of the loan or to minimize your monthly payment in the near future.

If you can swing it, don't roll every cost of refinancing into your new loan. Most people escrow for taxes and insurance. If you do, your current lender must give you you escrow refund within 30 days of paying off their loan. Your new lender, be it us or someone else, must take the equivelent amount of money (or more) at closing to start the new escrow account.

Remember that you always get to skip a month of payments. If you close June 5th, your first new payment is August 1st.

Knowing this, paying some of your closing costs out-of-pocket will save you even more money in the long run. Why roll in $4000 in closing costs, when you really only need to roll in $2000 ($1000 escrow refund + $1000 missed payment = $2000). Paying that $2000 over 30 years doesn't make sense if you don't have too.

On the other hand, some people love the fact that they didn't pay anything out of pocket to refinance, got a nice escrow refund check, then got to miss a mortgage payment. They use the 'extra' money to pay bills, go on vacation, etc.

Picking a Lender & Closing Costs

Shopping is confusing. No matter what we're looking for -- from cars to refridgerators -- there's a built-in element of confusion. Why? Lack of knowledge. An unfortunate rule of thumb is that the less we know about something we need to buy, the more we can expect to pay for it.

Shopping for a mortgage is complex at best -- even for the savvy previous home owner. Daily rate changes, time-sensitive lock-in periods, points, lender's fees... plus the emotional element of probably the largest financial deal any of us will ever make. Throw in to this already murky stew the ingredients of tricky rate advertising, commissions for every officer, agent and broker who 'helps' in your transaction, and the obscure differences between 'rates' and 'fees.' It's no mystery that many buyers settle for a mortgage that exceeds their monetary means out of sheer exasperation!

Please review our information on closing costs and "BAD Good Faith Estimates". There is currently a large number of fly-by-night lenders doing some incredibly misleading rate & closing cost advertising. Remember, if it sounds too good, it probably is! Also check out my article "Best Rate or Lowest Cost" for more loan comparison information.

The Bottom Line
Remember, the first rule is that there are no rules. You should refinance if it makes sense for you. Every person & situation is different. What makes sense for one family, may not make sense for you. Call me today to discuss your wants, needs, and goals. Together we'll determine if refinancing makes sense for YOU.

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Click here for 10 BIG Mistakes to Avoid

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