Why now is an ideal time to refinance a mortgage
By Erik J. Martin
CTW Features
Salivating over enticingly low loan interest rates and wishing you could get in on the fun as an established homeowner? There’s no time like the present to explore a mortgage refinance, which likely can pocket you plenty of extra cash, say the experts.
“I know lenders have been saying this off and on for years now, but the reality is that rates right now are near all-time historic lows,” says Trent J. Ford, executive vice president of Retail Lending and Branch Development for The Money Source in Melville, New York. “The dramatic decrease in rates recently has been driven by global financial worries — as economies in foreign countries have deteriorated, international investors have poured into American, German and U.K. bonds, which has driven down bond yields. Plus, in the U.S., mortgage interest rates are heavily tied to the U.S. 10-year Treasury bond rate, which is also at historic lows.”
And that means current borrowers are in a prime position to reset their mortgage loans and benefit from lower payments.
Amy Tierce, regional vice president of Wintrust Mortgage in Needham, Massachusetts, says many people qualify as worthy refi candidates, including consumers with an adjustable rate mortgage or a fixed interest rate more than 4 percent; borrowers who are currently paying mortgage insurance but believe the value of their home has increased enough so that their current loan to value is 80 percent; or better, those who couldn’t refinance in the past due to low or no equity but who may now be able to benefit from increased home values. Another growing segment that is viable for refinancing is homeowners who had income or employment issues that have been resolved.
Assuming these conditions are true and you qualify for a refi, the savings can be substantial.
“Suppose you currently have a 30-year $300,000 mortgage at a 5.5 percent interest rate, which equates to a monthly principal and interest payment of about $1,703,” says Kyle Winkfield, managing partner at Odell, Winkfield, Roseman and Shipp, a financial advisory firm in Washington D.C. “If you refinance to another 30-year mortgage at 3.5 percent, your new payment would be approximately $1,347, resulting in a monthly savings of $356 — an annual increase in cash flow of roughly $4,275.”
Refinancing doesn’t come free, however: you can choose to pay related closing costs (which often run from $2,500 and up, and include things like points, loan processing fees and title charges) or bundle the closing costs into the loan by paying a slightly higher rate — such as 3.75 percent instead of 3.5 percent.
“The general rule of thumb is that, if the payment savings make up for the costs of the refinance within five years, it’s worth doing — but that’s only true if the borrower plans on remaining in the property longer than five years,” Tierce says.
If you think you’ll remain in your home indefinitely, it may be best to pay the closing costs out-of-pocket to capitalize on the lowest interest rate possible and, thus, pay less in interest over the life of the loan, Ford says. “But a borrower who knows they do not intend to hold their loan for a significant period of time might be best off to opt for a no-cost refinance,” he adds.
You also can consider an alternative to a conventional refinance, including:
- Make accelerated payments on your current mortgage loan to pay off the loan early, thereby reducing the total amount of interest you will fork over.
- Pursue a refi through the Home Affordable Refinance Program (HARP, set to expire at the end of 2016), which is a good option for eligible homeowners that have little or no equity in their property.
- Explore a loan modification with your existing lender, who may be able to modify the rate on your current loan for a fee and/or a slightly higher market rate. “The advantages to this option are you avoid closing costs, the turnaround time is rather quick and you don’t reset the clock on your loan’s remaining term,” says Theresa Williams Barrett, vice president of Consumer Lending and Loan Administration at Affinity Federal Credit Union, Basking Ridge.
“The best place to start the refinance process is with your current lender. Most lenders offer great incentives to their existing customers to refinance with them — although it’s always a good idea to shop around,” Ford says.
Tierce recommends getting refi rate quotes from at least three lenders and comparing their rates and costs carefully.
“Select the one you feel most confident with, and remember that a lender cannot require you to pay any money until you’ve reviewed the Loan Estimate they’re obligated to give you and you’ve approved the terms of the loan,” Tierce says.
© CTW Features
