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To Refinance, or Not to Refinance – That is the Question

To Be or Not to Be

To Refinance, or Not to Refinance

That is the Question

 If Shakespeare were alive, he may have the same question that many Americans currently have.  Should I refinance my mortgage?

 There is no short answer to this question, but there are questions for this question. 

 The first question is “Will you qualify for a refinance transaction/loan?”.  With the financial downturn and mortgage industry turmoil, the guidelines for mortgage lending have changed dramatically.  Many people now find that there are unable to refinance at the advertised rates.  Some people find out that they are simply unable to refinance at all. 

  • Generally, higher credit scores are required.  As recently as five years ago a 620 credit score qualified borrowers for the best rate.  Now a 620, and in some cases a 700, credit score is the minimum for many programs.  Advertised rates are often based upon a credit score of 740 or greater. 
  • Most programs require more substantive down payments or equity positions.  Loan approvals may be more difficult due to slowing appreciating rates, as well as, depreciating real estate values.
  • Lower debt-to-income ratios must be met.  This is often to the chagrin of wealthier individuals that may live conservatively within their means, but may not easily document all of their cash flow. 
  • Additional restrictions have been put in place.  Transactions involving paying off debt, pulling out cash, properties with legal associations/entities, investment properties, adjustable rate and/or interest-only mortgages, and etc. now all see more restrictive requirements.

 

The next question is “How long will you have this prospective new loan?”.  All refinance considerations should take into account the benefit or savings from the transaction.  To do this, you need to know your time frame.

  • Are you planning on moving within the next three years?
  • Are you putting on an addition to your home next year?
  • Are you obtaining a reverse mortgage in five years?
  • Are you using the equity in your home to start a business this year?
  • Is there something else that would cause you to payoff, modify, or in some other way change your mortgage at some point? 

 Many refinance transactions can save tremendous amounts of money for borrowers.  However, there generally is a period of time that it takes to recoup the costs of the transaction (break even point).  If the new loan is paid off/refinanced/satisfied for any reason prior to reaching the break even point, it is unlikely that any benefit or savings have actually occurred.  

 Another question is “What is a meaningful amount that you wish to save from refinancing, and are you more concerned with short term or long term savings?”.  Some people may have the potential to save $75 a month while other people may save $400 or more a month (short term savings).  Some people may save $10,000 in total pay back while other people may save $200,000 or more in total pay back (long term savings).  Meaningful amounts are different for every person and their particular situation.  On top of this you have to again refer back to your “break even point” to help analyze the potential benefit. 

 As you can see, answering the question of whether to refinance or not is not a simple Yes or No.  Yet, the question can be answered.  In fact, there are sometimes better ways to address the question, and find a better solution. 

  • You may consider making the same mortgage payment even if a lower rate decreases your new mortgage payment.  This could drastically reduce your total pay back, and substantially increase your overall savings.
  • You can keep your loan amount as low as possible by bringing money to the loan settlement.  The lower loan amount will give you a lower payment, and greater long term savings.  This money could come from the one or two months when you won’t have a mortgage payment.  You will also be refunded your current escrow balance approximately a month after your mortgage is paid off which could provide more money from a cash-flow stand point.
  • You may include some additional debt (credit cards) with higher interest rates that typically take 20+ years to pay off with the minimum payments.  This could reduce your total pay back, and/or allow you to increase your contributions to investment opportunities. 
  • If you are 62 years of age or older, you may find that a Reverse Mortgage is more appropriate than a typical refinance option.  This option would eliminate your mortgage payment, and possibly provide an additional income stream.

 

Everyone has different needs, ideas, and requirements.  Talk to a licensed and knowledgeable mortgage loan officer about your particular scenario.  The answer to THE question is waiting.