With mortgage interest rates at historic 70 year lows now is a great time to refinance your mortgage. Before you refinance here are some important questions you need to answer:
Is my home worth more than I owe on it?
If you don’t have equity (home value in excess of loan) you may have trouble finding a lender to take your home as collateral. Most conventional lenders will only lend 75-80% of value. For those underwater or willing to pay PMI (Private Mortgage Insurance) there are FHA (Federal Housing Administration) programs that will lend a higher percentage of your home’s value, some up to 125%. If you can find a loan that will work in your circumstances, you should move on to the following questions.
How much will I save per year from refinancing?
Assume you owe $200,000 and have a current rate of 5.25%. If you can refinance at a rate of 3.75%, you will save 1 1/2% or $3,000 per year. Over 15-30 years, this adds up to a lot of savings. If you could refinance at 4.00% you would save 1.25% or $2,500 per year, and at 4.50% you would save .75% or $1,500 per year.
Often refinancing is not worth it where there is less than a .5 point rate differential. Refinancing costs such as points, appraisal fees, notary and escrow fees, title insurance and other costs can add up to thousands of dollars. It can take years to recover your refinancing costs when there is only a small rate reduction.
What costs I will be charged to refinance?
You may be charged points or loan origination fees ranging from a fraction of a point to several points. You may also be charged appraisal fees, notary fees, escrow fees, etc.
A lender might offer you a 4.50% rate for 0 points, a 4 % rate for 1.5 points and a 3.75% rate for 3 points. On a $200,000 loan, your points would be $0 to refinance with a 4.50% loan, $3,000 for a 4% loan, and $6,000 with a 3.75% loan. Your other (non-point) costs could total around $1,500 – $2,000. You must determine how long it will take you to recover total costs to decide whether refinancing is a good move, and if so, how many points you should pay to buy down the interest rate.
How long do I plan to stay in my home?
If you plan to stay in your home for many years, it is better for you to pay higher points to get a lower rate, but if you intend to sell the home soon, you should not lay out large upfront costs that you may not recover.
For example, if you were planning on selling your $200,000 home by the end of 2012, why would you pay $7,500 ($6,000 points + $1,500 other costs) to obtain a loan which would save you only $3,000 per year. You would have to keep the home at least 2 1/2 years to recover the upfront costs. In that case you might want to consider a higher interest rate with 0 points or, if you anticipate a quick and easy sale, to simply skip the refinancing.
Do I have need a reverse mortgage?
If you are elderly and need money to meet your basic living expenses you might need to consider a reverse mortgage. This is a special type of mortgage, where the owner is not required to pay back the loan during their lifetime. Instead, the interest which accrues on the loan is added to principal and the house is sold to pay the principal and interest when the owner dies.
The amount of money you can receive is a function of your life expectancy, the current value of the home, the interest rate and what you owe on the home prior to taking out the reverse mortgage. The disadvantage of a reverse mortgage is that it will impair or eliminate the home for purposes of leaving an inheritance to your kids.
Does my current lender have any special deals?
Don’t be fooled by special offers and teaser interest rates. Always, contact your current lender first. If you have a good relationship with the lender and have made your payments on time, some offer a streamline refinance program which could provide benefits such as a free drive-by appraisal or no appraisal, no new income verification, adding refinancing costs to principal, and other easier terms that could save you money and time.
What if I don’t qualify?
If you are very underwater or behind on your mortgage, you might not qualify for most refinance programs. Don’t despair. Check out the federal HAMP, Making Home Affordable program. In some cases your home state may offer programs to assist your with staying in your home. Check online to see if your state of residence offers any housing or mortgage assistance, such as the State of California Consumer Mortgage Information Page.
If not now, when?
In 2020 many will look back and say, “I’m glad I refinanced back in ’11-’12 when rates were 3.75%, which is so much better than the current rate of 14%.” For those of you who are not old enough to remember the 14% mortgage rates back in the late 70’s, may I be so bold as to suggest that now may be the time to refinance? For those who believe that hyperinflation is in our future due to the incessant “monetary easing” of the Federal Reserve, now is the time to lock in.