I would like to share with you some very important information to be considered. This will help you make the decision of whether to refinance or not. My views of this topic seem to be right on track with Cyd West, Senior Vice President of First Community Mortgage. I asked Cyd, the expert lender, to share her thoughts with you. If you have any questions, please be sure to contact us.
Chances are you’ve been asking yourself this question lately. Like most other big decisions, the answer is not “one size fits all.” There are many variables to be considered and your situation is as unique as you are.
Chances are you’ve been asking yourself this question lately. Like most other big decisions, the answer is not “one size fits all.” There are many variables to be considered and your situation is as unique as you are.
One thing to be considered is your current balance and the
remaining amortization. If you only owe
$40,000 and have less than 10 years left to pay you probably won’t benefit much
from refinancing. The costs would
greatly outweigh any monthly savings unless you spread the balance over a much
longer term. This could be a good move
if you plan to remain in your current home for a long time and desire a lower
payment. However, most homeowners dream
of being mortgage free and if that is your goal you don’t want to incur cost or
lengthen debt repayment.
Another important factor is your current interest rate. If your interest rate is less than one
percent above the rate being offered for the refinance it’s probably not worth
the expense of refinance unless you have a large mortgage balance, say over
$250,000. The more you owe, the more you
will benefit from any reduction in interest rate.
Even though most refinance offers tout “no money out of
pocket to close” there are almost always costs.
If you don’t pay these in cash at the closing of the refinance loan,
they are added to your loan balance.
It’s important to weigh the cost vs. benefit and calculate the period it
takes to recover the cost and reduce the new loan balance to the
pre-refinancing level. Your mortgage
professional can provide this information for you, but it’s up to you to ask
the questions.
Don’t forget that most mortgage payments include additional
items such as deposits to escrow for taxes, insurance and sometimes private
mortgage insurance or HOA dues. The
escrow account must also be analyzed and reestablished when the mortgage is
being refinanced. Depending on when
your annual taxes and insurance are due to be paid there may need to be large
amounts set aside to sufficiently set up the escrow. For most homeowners the largest of these
expenses is property tax, so chances are the escrow account for taxes will
require a healthy initial deposit if it’s near tax time. For example, the taxes in Bell County are
billed in October with a discount incentive to pay early. All servicers will attempt to take advantage
of that discount, so there must be an amount equal to a full year’s tax bill
(plus the allowable cushion – usually 2 months) in the account on October
1. If you are refinancing in August,
that means that you’ll be required to put 12-14 months of tax deposits into the
new escrow. You can see how this amount
can greatly increase the amount required for closing or increase the balance of
your loan if you are “rolling in” costs.
A surprise benefit is often a refund check from the escrow
account that was being held for the loan that was refinanced. When the new loan (refinancing) pays off your
previous home loan, the servicer has no need for the escrow account. You will receive a refund check for the
balance of the escrow within 30 days of the payoff of the previous loan. It’s your money to do with as you
please. If you chose to roll the cost
of establishing new escrow accounts into the new loan it is smart to take the
refund from the old account and pay it to principal on the new loan. If you were able to pay the costs of
refinance out of pocket, the refund will help you to recover those
expenses.
With current interest rates being the lowest in modern
history, it would not be wise to take an adjustable rate. There is nowhere for that rate to go but
up. A long term fixed rate is highly
recommended. Lock it in while interest
rates are at rock bottom.
It’s crucial to consider your future plans for the
house. Will you continue to own the
property for several years? Is it likely
that you’ll be moving soon? It would be
unwise to incur the costs of refinancing if you don’t plan to own the house
long enough to realize the maximum benefit of the lower payments. Additionally, the added cost of refinancing
may increase the new loan balance to the point that you cannot make a profit on
your sale or price your home competitively to sell. Again, it’s important to share your goals
with your mortgage professional so that the proper analysis can be done to
determine your best options.
Beware of high pressure, predatory lenders who come to your
home. You should be highly skeptical of
any in-home mortgage lenders with handwritten disclosures and “too good to be
true” examples of how much you can save with their super-duper refinance
product. It’s always best for you to
make the initial contact with any financial professional. Consult your personal banker for a
recommendation or the local Better Business Bureau.
Finally, don't be caught up in the frenzy. Just because all of your friends are refinancing or you can't listen to the radio without hearing a new offer, refinancing your mortgage may not be the wisest choice for you. Sometimes the hardest (and the wisest) thing to do is to do nothing.
