Considering a Refinance?? Have a clear goal in mind...

From the desk of:

Rich Storey
Mortgage Advisor
615.260.8028

Credited to: www.WashingtonPost.com



Is It in Your Best Interest?
Before You Join the Flock Trying to Refinance, Determine If a New Loan's Terms Fit Your Goals


On its face, deciding whether it's worth it to refinance your mortgage seems simple enough.
Shop for the lowest rate possible. Figure out what your monthly payment would be at that new rate. Compare it with what you're paying now and decide whether the savings (assuming there are any) offset the closing costs of the loan quickly enough.

But as with most money matters, nothing is that simple. Refinance applications have soared in recent weeks as interest rates hit record lows. The rush has slowed somewhat as rates have leveled off, but it may pick up again now that the Federal Reserve this week has renewed its commitment to try to push down consumer interest rates. While the gyrations in the credit market have made it tough for many people to take out a loan for a new home, it's less of a hassle to refinance, especially for owners with good credit who have built up equity over time.
If you're contemplating joining in, think about what you are trying to achieve by refinancing and how best to do so.

"It's not a one-size-fits-all type of thing. It's barely a one-size-fits-most," said Keith Gumbinger, a vice president at mortgage research firm HSH Associates. "You have to have a goal in mind."
Are you refinancing to save money by minimizing the total interest expense during the life of the loan, or are you trying to free up cash by lowering your monthly payment?
Are you rushing to pay off your loan as quickly as possible and, if so, are you short-changing your cash needs in the process or eating into your emergency fund?

Maybe you're eager to ditch an adjustable-rate mortgage before it resets, switching to a more predictable fixed-rate loan, as many consumer advocates advise. But have you considered that your loan may reset to a lower rate if it is tied to a Treasury index? Can you stomach holding on to it longer? Should you?

Answers to many of these questions are a function of timing.
Let's assume you live in Maryland and took out a new loan that saves you $50 a month. The average closing costs in that state last year were $3,117 on a $200,000 loan, according to Bankrate.com, a personal finance Web site that compiles an annual closing cost overview. It would take a little more than five years to break even on that loan. The goal is to get beyond the break-even point.

"If you're planning to sell the house within that period, it doesn't make sense to refinance," said Ric Edelman, a financial adviser in Fairfax. "But if you're planning to stay for 10 more years, it does make sense."

The same reasoning goes into deciding whether to pay points, which are the upfront fees borrowers pay to reduce the rate on the loan. A point is 1 percent of the loan amount.

Brian Ng knows all that, but he was still conflicted. He wanted to refinance and take out cash to spend on remodeling his home. A lender quoted him 4.875 percent on a 30-year fixed rate mortgage for $357,000. If he paid 1 point, he could reduce his monthly payment by roughly $54. But it would take him 5.5 years to recoup that cost.
"I plan on being in the house at least that long," Ng said. "Should I pay 1 point or keep the cash to help me pay for home improvements?"

First, find out how much that 1 point is buying, said Steve Calem, president of Capital Funding Group, a mortgage consulting and advisory firm. Typically, a point shaves an eighth or a quarter percentage point off the interest rate. Ng was offered a quarter point. But these days, a point can buy closer to half a percentage point, Calem said.

"If you're getting more than a quarter percent for the point, that's a real bargain and it's worth serious consideration," Calem said. He suggested that Ng try to have his lender increase the loan amount to accommodate the cost of the point, which would eat up only $15 of the $54 in monthly savings. "With such a low interest rate, I don't think he'll get cheaper money."

But there's another consideration for borrowers who pay high closing costs when they refinance.
"What if you want to refinance in another year because rates have dropped further?" Edelman said. "You will not have recovered the cost of the first refinance by then."
Ng concluded the same. This week he closed on a no-point loan.

For all those reasons, it is best to press your lender to waive fees and bring down the closing costs as much as possible, which some lenders are willing to do to win your business or keep it. They may fold the costs into the loan so you can avoid paying cash upfront, if you have enough equity. Even then, there may be some cash charges that are tough to duck, including an application fee of several hundred dollars.

By law, borrowers must receive from their lenders a good faith estimate of the closing costs and other charges within three days after applying for a loan. But it is only an estimate and it will not be as transparent as many consumer advocates would prefer. There's an effort underway to make these estimates less confusing.

"The lender is not required to let you know at the time of application what the estimate is, but I wouldn't sign any papers until I have a good idea of what the costs might be," said Jeff Douglas, president of Douglas Mortgage Services in Fairfax. "I would go over every line item with the mortgage loan officer so you can better understand what is being charged."

If you want to figure out some of the math up front, plenty of refinancing calculators can help you do that. But even with the numbers at hand, the best course of action depends on your goals.