Refinance Information

Whether or not you should refinance your home loan really depends on your situation and what you are trying to achieve. Before attempting to refinance, you should really understand what your goal with the refinance is, so that you can determine whether or not the refinance makes sense.

There are many different situations and reasons to refinance. Each have their own pros and cons. Here is a list of the ones we see most often:

To reduce your interest rate

This is one of the most common refinance situation when rates are low. What is often asked is, “How much lower does the new rate need to be for the refinance to make sense?” The answer to this question always comes back to cost. In truth, if the refinance doesn’t cost you anything and you can save .125% over your existing rate, then the refinance makes sense. This is rarely the case, but the answer still comes back to cost. Here is an example: If it costs you $2000 to refinance, and dropping your rate by .5% saves you $75 per month. Then the breakeven point on your refinance is the cost divided by the interest savings. $2000 / $75 per month = 26.6 months to breakeven As long as you anticipate being in the home longer than 26.6 months then the refinance makes sense. This example should begin to illustrate how cost factors into your ability to rationalize a refinance. If the cost were $10,000 to save $75 per month, your breakeven point would be beyond 11 years. Cost is as important as rate when considering a refinance.

To take cash out of the equity in your home

Refinancing your home to pull equity out can be a sensible move. Whether you want to do this really depends on where your current rate is at and how much equity you intend on pulling out. If this seems like something you think you need to do, be sure to check out our section below that discusses situations that don’t necessarily require a refinance.

The situations that usually fit into this category are when you are looking to consolidate a large amount of debt and the interest rate you have on your existing mortgage is high. The benefit of doing this is usually that you can reduce the carrying cost on the debt, lower the rate to service the debt, and turn the interest you pay on the debt into a tax deductible expense.

To shorten/lengthen the term on your mortgage

Shortening or lengthening the term on your loan has opposite affects on your monthly payment. In general, when you compare rates on loans with a shorter term the rates are lower than comparably sized loans with a longer term. The corollary to this statement is that payments on loans with shorter terms have payments that are higher than loans with higher terms due to the increased principal amount required to pay the loan off more quickly.

When you are comparing the refinance of a loan with an already short term to a loan with a short term (i.e. 15 year versus 10 year) you should pay special attention to the interest paid on each loan. The shorter the term on your existing loan compared to the new loan, the lower the interest savings because of how quickly the principal is being paid down. This is very similar to refinancing an auto loan in the last few years of the auto loan.

To remove a borrower in a divorce/partnership situation

Removing a person from an existing loan in the situation of divorce or dissolution of an investment property partnership remains a difficult proposition without refinancing. Refinancing is a solution in these situations, but the decision to do so is not typically made with a reduction in rate being the primary objective. Although it’s not bad either when we are able to get the rate lower too.

What many people are surprised by is that the person that was on the original loan is required to re-qualify for the refinance in many cases. There are a few cases depending on the type of loan that you have that this is not the case, but in general this is the norm.

To consolidate a first and second mortgage into a single loan

Often people will be in a situation where they have an ok rate on their first mortgage and a very high rate on their second mortgage. Sometimes it makes sense to consolidate the first and second mortgage into a single loan with a low fixed rate. This all depends on the interest that you are paying on your current first and second compared to the new single mortgage. Be sure you are doing your breakeven point math on the cost versus the savings.

To remove mortgage insurance

With FHA changing their guidelines to require mortgage insurance on their 30 year fixed loans for the life of the loan, this has brought removing mortgage insurance to the forefront. Whether to refinance or not to refinance…that is the question.

The question of refinancing to get rid of mortgage insurance reverts back to the mantra of any refinance – does it make sense? To figure this out you need to get answers to the following questions:

  • What is my current interest rate?
  • What is the current rate (or cost) of my monthly mortgage insurance?
  • Do I have an FHA loan? If so, when did I close on my FHA loan? Even further, when was my FHA case number ordered (ask the lender that did the loan)?
  • Will my current MI automatically drop off? Will it never drop off? Can I request it to be removed?

Asking these questions is going to allow you to compare your current loan, interest rate, and mortgage insurance rate to new mortgage options. It is not uncommon for us to deter people from refinancing with us because they are either very close to having their mortgage insurance drop off or the new rate is not better than their current rate with interest plus mortgage insurance.

Switching from/to an ARM

This is less common than the other situations on this list, but it does come up on occasion.

Choosing to do an adjustable rate mortgage (ARM) should really come down to how long you intend to live-in/keep the home. Many people decide to do an ARM because they don’t believe they will keep the home longer than the term on the ARM. Accepting an ARM almost always comes with a rate that is lower than the prevailing 30 year fixed rate. The reason for the lower rate is that the lender is guaranteeing the rate for a shorter period of time. After the initial fixed rate period the terms are historically worse than the prevailing 30 year fixed rate market.

If you had an adjustable rate mortgage in the last 5 years and it is currently in the adjustable period, chances are that your current effective rate is very low. That is great for now, but if your intentions are to be in your home for the next 10 years, getting the adjustable rate locked into a fixed rate with a predictable payment might be something you want to do.

Choosing to refinance from an ARM to a fixed rate will often increase the monthly payment, but what is gained in this situation is a predictable monthly mortgage payment.

Choosing to refinance from fixed rate to an ARM should decrease the monthly payment and interest, but what is lost is the predictability of the mortgage payment over the full term of the loan. If your intentions are to keep your home for only 5-7 years, this could make more sense for your situation than a traditional fixed rate loan.

Whenever we talk to our customers about refinancing their home loan, one of the most important concerns to address is the cost to refinance. In a refinance scenario, the cost of the refinance is as important as the interest rate. There are many lenders operating in the market that will tell you that the option they are presenting to you is a “no cost” or “low cost” refinance. For the consumer, you have to determine whether they are talking about “out of pocket cost” or actual loan fees. The best way to determine this is to get a written estimate of all costs.

Whenever we talk to our customers about refinancing their home loan, one of the most important concerns to address is the cost to refinance. In a refinance scenario, the cost of the refinance is as important as the interest rate. There are many lenders operating in the market that will tell you that the option they are presenting to you is a “no cost” or “low cost” refinance. For the consumer, you have to determine whether they are talking about “out of pocket cost” or actual loan fees. The best way to determine this is to get a written estimate of all costs.

The flip side of the refinance coin are situations that don’t necessarily require a refinance. Below is a list of situations that do not necessarily require a refinance:

You have a large amount to put towards the principal balance on your existing loan and you want the principal application to reduce your monthly payment

We get calls all the time from people that are moving toward retirement and they are trying to scale their budget down by reducing the amount of their monthly mortgage payments. What many loan officers don’t tell you is that you don’t necessarily have to refinance your mortgage in a situation like this to reduce your monthly payments. Obviously if your current interest rate is high, completing a refinance into a lower fixed rate would make sense.

If your current rate is competitive, what you want to seek out with your existing loan servicer is what’s called “a loan re-cast” or “recasting your existing loan balance”. Most loan servicing companies will offer this at least once in the lifetime of a mortgage. What this means is that you give the lender the large principal payment and then the lender takes the new principal balance and re-calculates your principal and interest payment based on the note rate and remaining term on your loan. They re-cast the principal balance over the remaining term.

There is usually a fee to do this of $250-$350, but this is much less than you will pay to refinance and you get to keep your current rate.

Contact us for answers to any other questions you have.

Top Reasons to Refi

  • 1.

    Interest Savings

    Most of the time, refinancing your existing loan is all about saving money! Remember to look at the actual interest savings on your refinance scenario. Just because the payment is going lower doesn’t mean that the interest you are paying is going lower.

  • 2.

    access equity

    Perhaps you need to consolidate expensive credit cards or a home equity line of credit. Maybe you need to take money out for a renovation or landscaping project. Turn the interest you pay on your debt into a tax deduction.

  • 3.

    shorter term

    Depending on how much you want to shorten the term on your existing loan, you could save on your interest rate while paying your home off faster.

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