*I just had a past client refinance their Hollister home mortgage with Mike Dececco with EverBank and it closed this week. They received the best interest rate of June and lowered their monthly payment by a few hundred dollars because they had a knowledgeable lender to help. Before you sign and documents, home owners need a strong support team. Ask Kristen if a refinance can work for you!
With ultralow mortgage rates now starting to creep up, some homeowners might be thinking that it’s finally time to refinance.
Despite six weeks of steady increases, fixed rates eased this week and are still below 4 percent. That means borrowers who have higher mortgage rates may still be able to take advantage of savings.
Refinancing originations nationwide totaled $1.5 trillion last year but are expected to fall this year to $1.1 trillion due to rising mortgage rates, said a projection from mortgage giant Freddie Mac this week.
Figuring out whether to refinance a loan can sometimes be difficult. Several factors should be considered, from length of the existing mortgage to the borrower’s financial goals.
“Make sure you’re not refinancing just because your neighbor is refinancing,” said Todd Pianin, president and founder of Samuel Scott Financial Group, a boutique mortgage company in San Diego.
How do you know if refinancing is the right choice? Here are six questions to ask yourself:
1: Where am I with my existing loan?
Homeowners who refinance can get a new mortgage with longer, shorter or the same terms. Those who have a 30-year fixed mortgage can refinance into a 15-year fixed loan, or vice versa.
Extending the term could result in a lower monthly payment but may result in paying more over time because the payments are stretched out, said Gabe del Rio, chief business officer of Community HousingWorks. The San Diego nonprofit group provides housing counseling.
Shortening the term could result in higher payments each month but it would shave off interest over time.
Also, consumers should figure out how long they’ve been paying their existing mortgage to see how much principal and interest has already been paid, said Pianin, the mortgage broker. A borrower who’s in Year 20 of a 30-year fixed loan generally shouldn’t refinance because most of the payments are going toward principal.
Knowing which term to choose also requires an honest assessment of where the borrower is in life. A retiree’s plan may be different from a newlywed’s.
2: What are all the costs involved?
Mortgage companies can charge closing costs and fees, including title and escrow insurance and an appraisal of your home. Get a tally of those costs upfront.
Also, there’s a chance the appraisal may not come in at a number that will qualify the homeowner for a refinance, warned del Rio. If that happens, applicants may be on the hook for the appraisal cost, which can range from $300 to $800 depending on the home.
3: Will the savings be worth it?
It may be if you’re getting an interest-rate reduction of at least 2 percentage points, said Faith Espejo, director of programs and operations of Housing Opportunities Collaborative, a San Diego nonprofit group that provides housing counseling.
For example, a borrower with an interest rate of 6 percent should aim for a refinance at 4 percent. A reduction of 1 percent to 1½ percent may be worth it, Espejo said, if there are no closing costs involved. If closing costs are involved, see how long it would take to break even.
Take the total closing cost of refinancing and divide it by the monthly savings to get the number of months it takes to recoup those upfront costs. Pianin’s rule of thumb: Don’t bother refinancing if the result is 18 months or more.
Loan amount: $350,000
Principal and interest, existing at 6 percent: $2,098.43
Principal and interest, new at 4 percent: $1,670.97
Monthly savings: $427.46
Recoup period for upfront costs: $7,500 (upfront cost)/ $427.46 (savings) = 17.5 months
Source: Housing Opportunities Collaborative.
4: What does a “zero-cost” refinance really mean?
It costs money to produce a loan, even a refinance, said del Rio, of Community HousingWorks. Mortgage companies make money off refinances in some way; it’s just a matter of how. Those firms that promise no out-of-pocket costs from consumers are generally charging higher rates, which are figured out in the secondary market, del Rio said.
Another way to disguise costs is to roll them into mortgage balances. Lenders are supposed to disclose the annual percentage rate, or APR, which factors in all fees and costs, said Dee Sodano, vice president of lending with Community HousingWorks. If the annual percentage rate is higher than the existing mortgage rate, then it may not be worth it to refinance.
5: What are rate locks?
See an attractive mortgage rate? Borrowers may be able to lock it in for a certain period of time. Lenders offer an array of terms, including 15 and 30 days. Ask if there’s a cost involved. There may be a hidden cost even if the answer is no. Like rates, locks also are figured out in the secondary market.
6: How do I find a reputable mortgage company?
It’s important to find a mortgage professional who will explain the pros and cons of refinancing, said Espejo, of Housing Opportunities Collaborative. Getting referrals would be a good start. Once you have at least three possibilities, interview them.
By Lily Leung on U-T San Diego