Is refinancing the right thing to do?

Mortgage and Lending with Guild Mortgage Co - Oak Harbor WA

Last week, I posted two separate articles on my website about refinancing. The first one is about whether or not it makes sense to refinance and takes the reader through the reasoning behind the refinance. A lower rate does not always make refinancing the right option. Just because you are getting a lower rate, doesn't mean you are saving money. Every loan and every situation is different. Please review the following to get a feel of what I mean:

by Fred Chamberlin, Senior Mortgage Consultant, Eugene/Springfield OR, 541-342-7576.

"Mortgage interest rates have dropped dramatically and are current at or near a 27 year low. That means you can save money on your mortgage payment every month, right? Well, the definitive answer to that is, MAYBE! Just because you can get a lower interest rate, doesn’t mean it is in your best interest to do so. Whether it is a conventional refinance or an FHA or VA refinance, a lot depends on what you have now and what you expect to accomplish.

The easiest way to show this is to give a couple of fictional examples. (These are conventional loan examples) First of all, let’s consider that your have a high interest rate on a small loan. For this example, assume you owe $60,000 on a home worth $200,000 and are paying 7.5% on a 30 year loan and are 7 years into the loan. Would a refinance at 5%*** be worthwhile? Conventional wisdom is that if you are saving 2% or more, it is a good move. Let’s take a look:

Current Payment—-Proposed Pmnt Hard—-Hard Cls Costs*

$457————– $341/$388** —————$3,500

Recovery of costs in approx. 69 months.

So, if you are going to be in your home for at almost 6 more years, this makes sense. If you are going to be there less time, it doesn’t and if you are not sure, it probably is a bad move for you.

Now, how about a different scenario? Assume you have a mortgage of $350,000 at 6.5% with 26 years remaining on a home value of $450,000.

Current Payment—–Proposed Pmnt——Hard Cls Costs*

$2,327——— $1,911/$2,041** ———-$6,000

Recovery of costs in approx. 21 months.

So here, you can see that a 1.5% change can more than pay for itself in less than two years. The interesting thing is that the 2% rule really doesn’t apply in either case. In one case 2.5% is not enough and in another 1.5% is.

* Cost associated with loan, doesn’t include prepaid expenses.

** New 30 Year mortgage payment/Payment to maintain current pay off schedule

***Used only for comparison purposes, not an offer.

These are just two examples. Every loan is different. There are no hard and fast rules. An FHA cash out refinance might be the best thing for you. If you use your home to pay off credit cards, what are your plans? Not doing anything might be the best thing for you. If you have a second on your home currently and it wasn’t used to purchase the home, to pay it off would make it a cash out refinance. They are priced differently.

There are a lot of other things to consider when thinking about a refinance. Are you looking to pay other items off? What is my loan to value? What is my credit score? The way to find out if a refinance is the right thing to do is to talk to a professional in the business. I am always available to answer your questions regarding refinancing or purchase. Rates are great, but that isn’t the only thing to be concerned with when considering a mortgage loan. Is it right for you? Should I put more down or borrow more? FHA/VA/USDA loans may be the way to go instead of conventional. FHA allows cash out refinancing up to 95% loan to value. VA cash out refinances are available up to 100%. USDA doesn’t do refinances but has purchase money available up to the appraised value even if it is over the purchase price. Check with someone you trust for up to date and good information for YOU! FHA Streamline Refinances and VA IRRRLs are almost always a good move.

Check out my next post where I cover, now that you know you should refinance, can you? The requirements and qualifications for loans have changed. Just because it may make sense for you to refinance to a lower rate, doesn't mean that you can.



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Bo Hussung
Bell Title /Triserv LLC - Nashvle, TN

Fred, your logic makes sense and allows for good sound financial advice. Payment is important, but not always the best and only reason for refinancing. One has to take into account the amount of time will be spent in the home and thus if any interest saving will be realized with a shorter payment time.



Jan 19, 2009 03:16 AM #1
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Thanks Bo, I think education is what we need to be doing in this business. Smart decisions will mean better recovery from the RE problems.

Jan 19, 2009 04:09 AM #2
Danny Thornton
R & D Art - Knoxville, TN
WordPress Guru

Fred, too many times have I talked to customers that have a 5% fixed rate and they want a 4.5% rate. My concern is "What is it you are trying to accomplish?"

Jan 19, 2009 04:20 AM #3
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Right you are Danny. You need to know if this helps their circumstances, not just make a loan with no reasoning behind it.

Jan 19, 2009 04:33 AM #4

My current mortgage was financed at 6%.  The original loan was for 107,800.  The payoff as of today is 98,253.  I pay extra towards the principal every month, around $70, sometimes more.  I just spoke to a loan officer at the bank about refinancing.  I can get a 15 year 4.5% loan with about 3600 in closing costs; a 20 year for 4.875 with 3085 in closing costs or a 30 year at 5.125 with 2700 closing costs.  My question is if I continue paying the current loan with extra towards the principal, how many years would it take to pay off the house.  Would refinancing be right for me or should I just continue as I am doing?  Lowering the payment would be nice but I'd really like to pay it off as soon as possible.  The house is valued now between 112,000-115,000.  Just not sure if refinancing is the way to go.

Dec 01, 2009 06:18 AM #5
Fred Chamberlin
Guild Mortgage Co - Oak Harbor WA - Oak Harbor, WA
Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant

Just off of the top, I would say it probably does make sense. Paying the way you are ($716 mo.) it will pay off in just over 23 years. If you financed a new loan of $101,338 the payment would be $661 on a 20 year term at 4.875%.

However, you didn't cover what kind of loan you have and if you have mortgage insurance or not. That could make a big difference on even being able to do the loan. Make sure the rate and fees are firm before you go forward but if you can do this, it makes sense to me. I think I will go into more detail on my blog,

Dec 01, 2009 07:15 AM #6
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Fred Chamberlin

Oak Harbor/Whidbeynulls, #1 Experienced FHA Mortgage Consultant
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