Refinancing is the first thought in many people’s minds as they notice fixed mortgage rates dropping, but one often forgets to factor in loan origination fees and closing costs.
If you were to spend $18,000 on closing costs and amortize that expense over only 36 months, for example, you would be paying an extra $500 per month on top of your mortgage. This example assumes that after the 36 months, you would either sell your property or refinance.
On a $1 million loan for 30 years, for example, a 0.75 percent reduction in the interest rate from 5 percent to 4.25 percent would reduce your monthly payment by $449.
Of course, the analysis changes dramatically when you keep that loan for five or six years, amortizing the costs over a much longer period. The longer you keep the loan, the more benefit there is on a monthly basis. Of course, as a reminder, the less interest you pay, the less you write off for taxes.
There are many reasons people refinance other than to lower their payment or save on interest. Perhaps you started with an adjustable-rate mortgage because you were anticipating rates coming down, and indeed they have. Now you just need to know when to lock in your fixed-rate and hope rates won’t go down even more afterward. That said, better for rates to go down more than to wait too long and see rates go up.
Another reason people refinance is to pull equity from their home for any number of reasons including divorce settlement; paying out the selling partner; drawing cash for remodeling and home improvement: funding college education; everyday living costs; travel and entertainment; and financing business ventures.
In some cases, you can refinance up to 80 percent. In good times, there can be multiple opportunities to do that, and opportunities to reduce your interest rate at the same time. Consult with a financial advisor to do multiple calculations, and shop with a highly respected mortgage broker to get good answers to your questions and trusted guidance. You don’t want to wait too long, go too soon or pull too much of your equity unless you have a well-planned strategy.
Refinancing requires good credit and income qualification in most cases. Be leery of hard money loans with balloon payments, and higher interest rates offered to borrowers with no qualifying income and poor credit scores. Always do your homework.
Ron Wynn has been among the top 100 agents in America for over 10 years, as noted on REAL Trends/Wall Street Journal. Ron has represented over 2,200 sales totaling over $1.5 billion in sales volume in his 30-plus-year career as a real estate broker in California.
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