We continue to try to reach homeowners who have not pursued a refinance when rates drop. We particularly want to dispel the concept that you need to reduce your interest rate by 2% for refinancing to benefit you. That was true when rates were much higher than they are now. We have found that historically, lowering your rate 15% of your current rate is usually a financial opportunity. Example 6.00% -.9% = 5.10%. This scenario usually offers a significantly lower monthly payment or the opportunity to reduce the remaining term on your mortgage significantly. If you can lower your term by 5 years on a $750 P&I payment, you lower your payback by $45,000.
With the unexpected lower rates of 5% and lower, even the 15% rate reduction may not work since interest becomes such a small amount of the total payment. We may need to look at each loan on a case-by-case basis in terms of dollar savings and breakeven figures. The industry guidelines are that a refinance should put you ahead in four years. We feel that is too long. We prefer refinancing cost be recouped close to two years. Example, closing costs, excluding escrow and interest, is usually going to push $3000. If your mortgage balance is $150,000 and you can lower your interest .75% (or over $1000 per year), you will recoup your cost in less than three years. This supports both conclusions that refinancing over $200,000 will recoup in two years, however, this may be questionable on a balance of $100,000.
Don’t miss the opportunity that today’s lower rates offer. Less than 6% is still amazing, 5% or under was not expected. Should you be able to take advantage of 10 to 15 year rates, they are truly amazing. How do we reach out to you?
The above concepts are greatly affected by the loan to value of the refinance. If the refinanced loan will now be under 80% and the present loan has a mortgage insurance premium and the new loan will not, the refinance will be enhanced. If the refinance will still be over 80% of present value, we have to look at each loan case-by-case. Some insurance premiums have increased to discourage a refinance. Refinance comparisons are also not possible if your present loan is an adjustable mortgage, interest only mortgage, or if you’re consolidating a present first and second mortgage. We believe that present rates should encourage you to check into a refinance if you have any of those scenarios.
Lastly, the calculations for rate benefit are important, but may not be the determining factor if you are considering a “cash out” refinance. Cash out refinances are often used to pay off debt or to make home improvements. While conventional cash out is limited to 80% of present value, VA and FHA will allow a higher cash out option. Even these programs have gotten stricter, but are still available at this time. A refinance is not available if a mortgage payment has been 30 days late in the last 12 months.
When not to refinance
If you really want to purchase a new home, don’t refinance. We often refinance a borrower to consolidate debt and get the budget in order, resulting in their being in a financial position to move up in their housing. Take time to review your financial situation for proceeds and ratios if you sell and buy.
Don’t refinance to “over improve” your present home. Internal improvements may well be a dollar for dollar resale value, but additions and detached buildings may not be a good investment. Seek professional input from a real estate agent.