As the economy works its way out of the recession, the Federal Reserve has indicated its willingness to keep interest rates low.
As a consequence, mortgage rates are at the lowest levels seen in recent history. According to Bankrate.com the average 30 year mortgage rate is currently 4.98 percent. This then raises the question, should you consider refinancing your home mortgage to take advantage of these historically low rates?
The most common reason for refinancing is to reduce one’s monthly mortgage payment. A homeowner with a current 30-year fixed mortgage of $150,000 at seven percent would save $192 per month with at new loan at five percent. Another good reason is to convert an adjustable rate mortgage to a fixed rate, with a long-term predictable monthly payment. Some individuals refinance to improve their mortgage terms, such as reducing the length of their mortgage from 30 years to 15 years or eliminating private mortgage insurance (PMI) payments. Finally, if a homeowner desires to convert some of their home equity to cash for a major expenditure, such as college financing, starting a business or home improvements, refinancing may make financial sense.
When to refinance?
As a general rule, refinancing should be considered when the new mortgage rate is 1½ to two percent below the existing rate. However, there are a number of factors that should be considered.
n What are the terms of the current mortgage? Length of time remaining, interest rate, prepayment penalty, Private Mortgage Insurance (PMI), etc.
n The current appraised value of the home and the owner’s equity.
n Length of time the owner plans to stay in the home.
n The owner’s credit worthiness.
n The terms of the new loan and refinancing costs.
Refinancing is typically impractical for homeowners who have 10 years or less to pay off their mortgage or plans to move within 3-5 years. Additionally, if the owner has less than a 20 percent equity position or if their credit has deteriorated, the cost of refinancing may be prohibitive.
What does it cost?
Refinancing, as a general rule, will cost three to six percent of the mortgage balance. For the $150,000 mortgage mentioned earlier, refinancing could cost $4,500-$9,000. The refinancing costs can be paid out of pocket or rolled into the loan amount. If paid out of pocket and using a refinancing cost of $6,750, a monthly payment saving of $192, it would take approximately three years to payback the refinancing costs. If the refinancing costs were rolled into the mortgage, the total mortgage amount would be $156,750 and the monthly payment saving would be reduced to $156.
Six steps to refinancing?
1 Review your existing mortgage documents and the last year-end statement. Look at the interest rate, loan balance, length of time remaining on the loan, whether there is a prepayment penalty and if there is PMI.
2 Check your credit reports for inaccuracies. The online source, www.consumerinfo.com, for a fee, provides all three of the major credit reports and scores, in an easily comprehensible format.
3 Assemble the following documents: The last two years federal tax returns and W-2’s; recent pay stubs; other sources of income; a complete list of creditors, investment records, such as bank accounts, etc.
4 Meet with your existing lender first. Rather than lose your business, they may offer you very favorable refinancing terms.
5 Shop and compare at least three other lenders before applying for a loan. There are a number of on-line lenders that can be considered. The Web site www.bankrate.com is straightforward and easy to use.
6 After you have selected a reputable lender and have been approved; carefully review the loan documents before signing, to make sure that they are what you agreed to.
If it is appropriate to refinance your existing mortgage, you should start the process now. As the economy improves, interest rates, may be headed upwards in the near future.
Michael G. Shinn, CFP, Registered Representative of and securities and investment advisory services offered through Financial Network Investment Corporation, member SIPC. Visit www.shinnfinancial.com for more information or e-mail shinnm@financialnetwork.com.© Web sites listed are not under the control of Financial Network Investment Corporation.
