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Frank S
Manager of Commerce and Development at National Hockey League pursuing my MBA in Marketing at St. John's University
With the housing market in the news as much as it is today should I look into re-financing? What are the positives and negatives of re-financing so soon after purchasing?
I became a first time homeowner back in September and at the time I thought I had received a favorable mortgage rate for someone of my age and income.
Good Answers (14)
Larry H
Program Director, Market Strategy & Planning, IBM Enterprise Content Management
Best Answers in: Personal Real Estate (1)
Frank - Some answers are vagued, some specific. You have some good information to move forward. Key is this: break even analysis, which is really quite simple. Get a good estimate of the closing costs of your new mortgage, and determine your monthly savings from the lower interest rate. Divide the closing costs by the monthy savings to see how many months it takes to break even. Then decide if you are going to own the house for a period greater than that - specifically, much longer than that in order to "take advantage" of the re-fi. (More on this later...)
Considerations: Obviously, you want the lowest closing costs possible. Negotiate with your mortgage broker to eliminate the loan origination fee, mortgage application fee and as many of the "junk" fees as possible. Eliminating the origination fee, however, means that the interest rate will be slightly higher - brokers do need to make money on the re-fi, through a combination of up front fees like origination and loan application or through the back-end spread (difference between their cost of funds and what they charge you). If they get less up front, they get more on the back-end, meaning a higher interest rate they charge you.
Loan seasoning is another consideration, but you are most likely beyond that - your previous loan originator should be able to answer that for you. Loan seasoning varies by lender and loan type, many are 90-120 days, could be longer. If you re-fi before your loan is seasoned, the lender often goes after loan originator to get more money from them because their mortgage investment did not return enough in the short term to cover their investment requirements. This is not a pretty scene.
Also, I assume you want to re-fi your existing loan without pulling money out. If you pull cash out of your equity (re-fi for more than your current loan), you will pay a slightly higher interest rate as well.
Assuming you have a typical 30-year fixed and are going for the same (stability today is quite important - nobody can predict where rates will be in 6 months, let alone 6 years, other than they are likely to be higher than today), the final decision is based on how long you plan to live there.
In my case, I bought a new house in Dec 2007 and got a good rate at the time on 30-year fixed. I've looked at rates since then, but they are not yet attractive enough to re-fi. If closing costs are $4000 and I save $120/mo (on principal and interest), I break even in about 33 months. If closing costs are $4000 and I only save $60, I break even in about 67 months - 5-1/2 years. I would not go through the trouble if there was a possibility that I may move in say, 6 to 7 to 8 years. If I expect to live here for 10 years or more, then I actually am able to take advantage of the lower monthly payments long term. Living here for just long enough to break even is not advantageous...it's living here long enough "after" break even to benefit from the lower monthly payments.
Hope this helps.....
Jim P
Responsible for Product Marketing & Management for CDMA, UMTS & Mobile WiMAX Wireless Infra & Femtocell product lines.
Best Answers in: Personal Real Estate (3), Personal Investing (2), Economics (1), Retirement and Estate Planning (1), Wealth Management (1), Wireless (1), Using LinkedIn (1)
No need to refinance unless the interest rates have dropped a significant amount since you purchased your home. It will take many years to recoup the costs of a re-fi.
Without any of the details needed (i.e. type of loan, rate, term, LTV,etc.), it is a little hard to give an answer. Also, there may be local things to your area to consider. I would ask your real estate agent that represented you back in Sept. or your tax expert for their opinion. Generally, unless you have some kind of "exotic", you are probably better off just holding out at this point. Is your local market stable? Here in Rochester, NY, there hasn't been the highs and lows that some areas are seeing and most paper tends to be conventional, so that the average person shouldn't be in trouble because of the type of loan.
Frank.
Refinancing can provide a lower interest rate as well as pulling equity from your home. However, given your short time of ownership and the lower prices in the market, you may not have enough equity to pull unless you put a large amount of $$ down.
You might do a quick analysis of your closing costs compared to your mortgage savings over the period of time you plan to stay in your current home. Consider your closing costs could run as high as 2% of the mortgage. A good mortgage broker can give you a good closing cost estimate. It all hinges on how long you plan to be in you home after you refinance.
As an alternative, you might consider a home equity line of credit (HELOC). Closing costs are usually lower and you can draw this $$ as needed and pay it back like a credit card account. The advantage is you get the tax deduction since its a loan on your home.
Good luck.
Paul
Hi Frank: Typically a refinance can work if you're able to secure a rate that is 1-2% less than what you currently have. The other part of the equation is how much equity you have in your place. I've run a lot of scenarios this year so far regarding refinancing. Most of the time it didn't make sense; the costs far outweighed the savings. Although interest rates may be lower than when you bought your place, it's important to look at the numbers. Take care.
Paul
Hi Frank,
If you can find a lower rate that is 1 percent ,or 1 point, and plan on staying in your home 6-7 yrs. then is would be a good move. Talk with the loan officer and they should be able to show you in writing how long it takes to re-coup the money it takes to close your re-fi. shop around to see who has the least amount of costs to close the re-fi. Call 1-877-399-7753, tell them I sent you and they can answer any questions. They respond fast, in fact, they offer a same-day loan decision or they will pay you 250$
Phyllis H
Manhattan Luxury Real Estate Sales- Former Mortgage Specialist @Salomon Brothers/Bear Stearns/Smith Barney
To consider refinancing, as you know, is a funtion of what your current rate is. With credit spreads widening as they have, originators are now commanding higher credit scores than previously. Apparently unless you have a score of 720 or higher it can be quit difficult. Bloomberg.com posts current mortgage rates and you will see rates are a bit higher than they were one year ago.
Vito B
Senior Executive with success in driving top- and bottom-line performance in global consumer packaged goods.
It's a simple financial exercise. You will have one-time expenses associated with the refinancing. You will compare these expenses to the potential savings you will get from refinancing at a lower rate. You will then be able to determine the payback period which means how long it will take for the savings to match and then exceed the one-time costs you incur. If you are going to be in the home longer than the payback period, then you will have a positive NPV or Net Present Value on the transaction and it will be obvious that this is the right move to make. If you were going to move in 12 months and your breakeven point was eighteen months, then it would not make sense to refinance. Make sure you include any pre-payment penalties (if they exist on your present mortgage) in the anlaysis.
Links:
Frank, you don't have to refi. You can, though, accelerate the pay off of your mortgage without increasing the monthly payment. Using the Money Merge Account software, in conjuntion with a HELOC, you can pay the mortgage off much faster and save ten's if not hundreds of thousands of dollars in interest.
The problem is that the property is probably declining in value (%) faster than you can pay off the mortgage. This is because the front end of the mortgage is highly in favor of the lender with the vast majority of the payment going to interest rather than principle. The Money Merge Account software calculates exactly how much, and when, you can safely transfer money from the HELOC to the 1st, and thus increase the principle payment immediately. This event causes the total months due on the mortgage to shrink. Both the 1st and 2nd pay off at the same time, but the software focus' on reducing the 2nd faster in the early part of the process.
Clearly, you've got to have a handle on your expenses, and you must have more coming in than going out to make this work.
This is a practical, powerful, debt management and financial planning tool. And, there are thousands of homeowners using this software now with complete success. (see testimonials at the replicated web site)
Because this is a new and radical approach to paying off your mortgage, there are many agnostics (without knowledge) that just can't accept this proposition. Do your own homework like may others have, and see if it fits for you.
Links:
I don't think you need to refinance as your loan is still not quite "seasoned" yet. Refinancing will only make sense if your monthly payment will at least drop by 15 to 20% of your current payment or you are reducing the number of years to amortize your loan.
Frank,
If you can find a mortage broker who will do a no cost refinance, then it might make sense if the rate is lower than what you have today, otherwise as the others have pointed out, you need to factor in your costs of the loan along with the savings on the rate. There are brokers out there who will do no cost refi's, but you may wind up paying a slightly higher rate.
Good evening Frank,
While all of the answers have some good advice, there is really no way to answer the question without knowing all of the details of both your current mortgage loan and what you would hope to gain from refinancing the property. There are just too many situations where following conventional wisdom regarding mortgage options can cost you.
A simple cost/benefit analysis will determine if the costs associated with a particular refinance can be justified by the monthly savings, but that doesn’t answer the question of whether or not to refinance. Every situation is different, and while many share common aspects, any evaluation regarding your mortgage financing has to start by looking at what you hope to accomplish by refinancing and where your mortgage obligation and housing needs fit into your long term financial plan.
On a secondary note, you mention being feeling pretty good about your interest rate given your age and income. I’d like to know why you think your age and income has anything to do with the terms of your mortgage loan because of the Federal Equal Credit Opportunity Act, which states……….
When Deciding To Give You Credit, A Creditor May Not...
• Consider your age, unless:
you’re too young to sign contracts, generally younger than 18 years of age;
you’re 62 or older, and the creditor will favor you because of your age;
it’s used to determine the meaning of other factors important to creditworthiness. For example, a creditor could use your age to determine if your income might drop because you’re about to retire;
it’s used in a valid scoring system that favors applicants age 62 and older. A credit-scoring system assigns points to answers you provide to credit application questions. For example, your length of employment might be scored differently depending on your age.
When Evaluating Your Income, A Creditor May Not...
• Refuse to consider public assistance income the same way as other income.
• Discount income because of your sex or marital status. For example, a creditor cannot count a man’s salary at 100 percent and a woman’s at 75 percent. A creditor may not assume a woman of childbearing age will stop working to raise children.
• Discount or refuse to consider income because it comes from part-time employment or pension, annuity, or retirement benefits programs.
• Refuse to consider regular alimony, child support, or separate maintenance payments. A creditor may ask you to prove you have received this income consistently.
If someone sold you a “good rate considering….” kind of pitch, I would have your mortgage situation examined by a mortgage professional with a reputation based on recommendations from friends, family and business associates. Discuss your current loan and be sure to be clear about what you are trying to accomplish. You might be surprised with what he or she will come up with.
Hi Frank
I agree with some of the answers you have already received and would also need some more information...It is all based on the rate you are paying now and what you are being offered to really know if it would make sense
Keep in mind too that your property's value has probably decreased which would have a big impact on your re-finance
Dave R
Owner, UtahDave - Robison & Company Real Estate and Real Estate Consultant
Not an answer you can look at with that much information.
There are things to consider. Costs to refinance. Whats the new rate. Do you plan on staying in the home for 2 years or 5 years?
Typically a general answer is the cost is worth it if you are staying in your home for 2 years and the rate difference is one point. Not always the case.