When Does Re-financing Make Sense?
Now that rates have hit some 40-year lows in the past week, I have been asked by several past clients and friends the same thing, “should I re-finance?” The answer to that question is different for each person depending on their particular situation. But because we are seeing some of the best interest rates of my lifetime, I have decided to make a cheat sheet for all my friends and clients. (Actually I am stealing it from a great Realtor friend of mine)
Let me preface, I am not a mortgage broker, I am a Realtor. However, I do try and stay abreast of the overall economy and the ever-changing mortgage market. So I am giving you a basic overview of my opinions, by all means please do not take my word as the gospel.
This is straight to the point and I must give some credit to my good friend, Michael Maher, a Realtor in Kansas City. Thanks Michael!
In General! You should re-finance if:
• your rate is 6% or above on a 30 year mortgage
• you are in any kind of adjustable rate product (possible exception below)
• you are in any kind of interest only product
• you are planning on staying in your home for two or more years
• you want a chance to go from a 30-year mortgage to a 15-year mortgage
• you want a chance to go from a 15-year mortgage to a 30-year mortgage in order to save some money
• you want to consolidate some debt at a higher rate (credit cards, other loans,etc.)
• you want to skip a monthly payment during the next two months to pay down Christmas bills (when you re-fi, you typically have about 45 days without payment because mortgage interest is usually in arrears) DO NOT use the windfall money for disposable income, use it for some bill!
• If you have 20% equity in your home and this gives you the opportunity to knock off the private mortgage insurance (PMI)
If you have any further questions on whether this would be a good time to re-fi, please email me at email@example.com and we will contact you promptly.
In General! You should not re-finance if:
• your current rate is fixed in the low 5’s
• you will moving in the next two years
• you are one of the lucky ones who have a mortgage that is tied to the prime rate (usually investor loans), some adjustable rates are also based on prime or a margin plus prime.
• your existing mortgage has a pre-payment penalty that the mortgage co. won’t waive
• the value of your home is less than your mortgage ( you are upside down)
There are exceptions to these rules!
A quick example to determine your break-even point
Current rate: 6%
Re-fi rate: 5%
Current Monthly payment: $1199.10
Re-fi payment: $1073.64
Monthly savings: $125 That’s GOOD!
Est. fees to re-finance: $3000 ( I can probably help you do better-think volume here)
Break even: 3000/125= 24 Months
• In this case, if you are planning on staying in your home for over two years it may be wise to investigate your re-finance options.
• Disclaimer: above mentioned fees and rates are estimates and your rate, fees and mortgage could differ based on your credit score, credit history and other factors. I am just here to help and council.
Rates could go lower ( I know of some 4.875% quotes as of Friday 12/19/08), but I do know the market has anticipated some of these low levels. The bond market usually adjusts ahead of when the public is hearing the Feds have lowered rates. So it is anybody’s guess if they will go lower. I do know that they are historically low right now! I just want try and help as many friends and clientele as I can by giving you this information. Hopefully this helps some of you take advantage of this incredible mortgage market.
Maybe, just maybe, the federal government has given you and your family a terrific gift this Christmas. That is my hope!
John Jones Real Estate