Refinance Now?
Feeling cash-poor after the holidays? If you dropped $1,200 on gifts - like the average household - you're certainly not alone.
But in one quick move, you might be able to improve your situation. How? Refinance your mortgage. At press times, rates had dipped to their lowest point in 20 months with 30-year fixed-rate mortgages going for asbout 7.09%. "We are within shouting distance of 31-year-low rates," says Keith Gumbinger of HSH.com, the nation's largest publisher of mortgage infromation.
How do you know it's time to head back to the well? If you find yourself in one of these categories:
• You're overpaying. If you bought your home in the spring or summer of 1999, or even in the spring of 2000 (which would put your rate in the 8% to 8.5% range, consider refinancing. Even if you think you can't raise the closing costs, which typically run about 2% of the deal, you may be able to refinance for a rate a little higher than average with no closing costs and still save money.
• Your loan is adjusting. If you took out a one-year adjustable-rate mortage a year ago, or a 3-1 hybrid ARM a few years back, you're now looking at a rate in the mid-8% range. you can significantly improve on that by refinancing.
• You need the cash. If you've seen some appreciation in the value of your home, as many have, and you need some cash to pay down credit card bills or for some other pressing need, you can refinance and draw on the equity of your home. With credit card rates running, on average, more than double today's mortgage rates (which are tax-deductible to boot), this can be a smart move.
• Your jumbo loan isn't jumbo anymore. Rates on high-end "jumbo" mortgages usually run about 3/8% higher than rates on "conforming" mortgages. But starting this year, Fannie Mae and Freddie mac have raised the limit you can borrow on a conforming basis from $252,000 to $275,000. If your loan is below that amount, you can refinance into a conforming loan and save money.
• You're due to dump PMI. If you don't have 20% equity in your home, lenders generally require you to take out private mortgage insurance. Once you pay down your loan to 78% of the value of your home, your lender has to cancel that insurance, which can save $25 to $150 a month, depending on the size of your loan, according to Gumbinger. If your home has appreciated in value, that alone may have boosted your equity over the 20% cap. Refinancing can lower your rate and enable you to get rid of the insurance in one swift move.
With rates low, refinancing a mortgage can make sense
If you've been reading the paper or even watching TV, then you should know that mortgage rates are at their lowest point in two years .And if you're a homeowner and you've been considering refinancing your mortgage, you may be able to save a lot of money.
Take Anita Santana, for example. Santana, who owns a home in Boca Raton, recently refinanced her 10.75 percent mortgage and cut her interest rate to 7 percent. Her savings? About $400 per month that I can now invest in my IRA or put in the bank," Santana said.
"Business has picked up because of the low rates," said Lee Eisenberg, president of Boca Raton based Leading Edge Mortgage Corp. "I'm getting a lot of phone calls about refinancing."
Interest rates are now at their lowest point in two years, averaging 6.95 percent for a 30-year fixed-rate loan. Eisenberg advises clients who have mortgages of at least 8.25 percent to look into refinancing because the savings can be significant enough to justify the cost.But refinancing may make sense for others as well. People who have adjustable-rate mortgages can now lock in fixed-rate loans at historically low interest rates. And some homeowners may want to refinance to reduce the term or their loan and pay it back more quickly substituting a 15-year loan for a 30-year, for example.
Right now, mortgage refinancing is booming. According to the Mortgage Bankers Association of America industry trade group, 59.5 percent of all mortgage applications during the last week in March represented refinances, up from 51 percent the previous week. A year ago, when 30-year fixed rate loans averaged 8.3 percent, refinances made up to 21 percent of all mortgage applications.
So how do you know if refinancing is right for you: "You really need to do the math, said Mari Adam, a certified financial planner with Adam Financial Associates Inc. "Odds are that you can have a lower rate than you have, but whether it pays off for you just depends."
Indeed, homeowners need to get out their calculators or access one of the many web sites that contain financial calculators. As refinances have costs - about $2,500 for title, documentary stamp, credit report, appraisal and incidental bank fees on a $100,000 loan, according to Eisenberg- homeowners should compare the costs with their monthly mortgage savings to see what their break-even point is. You also have to consider how long you intend you stay in your home.
"A rule of thumb I try to give people is that if it's going to cost them $3,600 to refinance in closing costs, and they're going to save $100 per month, then they know that their break-even point is 36 months," Eisenberg said.
Many homeowners are also capitalizing on rising home values to do "cash-out refinances," in which they increase their mortgage balance to take some of the equity out of their home to pay for home improvements or other expenses. But with mortgage delinquencies on the rise-4.54 percent of all mortgages were delinquent in the fourth quarter of 2000, according to the mortgage bankers association, the highest rate since 1992-homeowners need to exercise caution to avoid overextending themselves and getting into debt trouble in the future.
Figuring out refinancing costs
Does refinancing make sense for you? Here's an example that shows what factors must be considered.
First, let's say you get a 30-year fixed-rate, $100,000 mortgage. If your old mortgage rate is 8.25 percent, your monthly payment of principal and interest is $751.27. If you could find a 7 percent mortgage rate now, that payment would drop to $665.30.
That amounts to a monthly savings of $85.97. Assuming typical closing costs of $2,500, it would take 29 months to break even after a refinancing. So, if you intend you stay in your home for at least 29 months, refinancing makes sense.
Your Home and It's Equity
Most of us from time to time find it necessary to borrow money, but sometimes we need short-term loans until payday and sometimes we need money for a little longer, to pay for house or car repairs, medical bills, college tuition, etc. You get the picture - we all do it.
The most common place we resort to for finding money is the ever-handy credit card. Typically, they carry interest rates of anywhere from 13 percent to 22 percent and cash advances can be even more because usually they carry additional fees.
The interest charge on credit cards and car and boat loans is no longer tax deductible the way interest on your mortgage is. The question then becomes, "Is there a better way to borrow money?"
Yes, there is. And it's called the Home Equity Line of Credit, or HELOC. Why is this better? It's simple. The interest rate is lower than credit card rates, and secondly, usually the interest on a HELOC is tax-deductible at the end of the year, the same way your mortgage interest would be.
Like a credit card, with a HELOC provides you with a line of credit and you receive a checkbook. You can write checks whenever you want for any amount up to the total of your credit line, just like your credit card. As your pay down the principal borrowed, the money automatically becomes available again. You can buy a car, a vacation; make house repairs, anything you want, just write a check. And if you have no outstanding balance, the account stays open and you pay nothing. Interest rates for a HELOC typically runs from 8.5 percent to 12.5 percent, considerably less than the average 18 percent that credit cards carry. And, as I mentioned before, depending upon your income, tax bracket, and available deductions, this interest - because it is alien (secured by) on your primary residence - is usually tax-deductible, thus giving you the double benefit.
To be sure whether or not your HELOC would be deductible for you, it is best to speak to your accountant.
Another good thing about these loans is that because they are secured by your home, you can borrow to the limit of your home's full value. In other words, a $150,000 home with a first mortgage of $125,000 can usually borrow the remaining $25,000 in equity in the form of a HELOC, and sometimes depending upon the credit history and the income of the borrowers you could borrow up to 125 percent of the value of the property. In this instance, $62,500.
That would pay for a nice vacation!
Why Use a Mortgage Broker?
Mortgage rates are dropping and may continue to do so. Now is the time to refinance or to purchase a home. But if the rates are falling when do I lock in an interest rate?
If rates continue to drop what do I do if I have already locked in a rate?
Use a mortgage broker. There is a primary reason to use a mortgage broker rather than a bank, in declining interest rate market.
When you ask a bank for a quote on a 30-year fixed rate mortage they only have one rate to offer. That rate will be dependent upon whether or not you desire to pay points to lower the interest rate, which you should rarely, if ever, do, and the length of time that you lock-in for.
The longer the lock period, the higher the rate. When you lock-in a loan with that one bank, you have made a commitment. Based on your commitment they have made a commitment to deliver a certain size mortgage at a specific interest rate. If you go back to them and ask them to give you the lower rate, that will usually cost the bank money and therefore they will be unwilling to change.
When you go to a mortgage broker, they control your loan package and they deal with multiple lending institutions with multiple programs. If, with your approval, they have locked in a loan with one instituion and the rates continue to fall, they always have the option of negotiation with the first institution or moving the loan to another lender in order to get you a better rate. A bank would never send your businness to somebody else. You would have to go throuhg the entire application process all over again and pay additional fees.
With a mortgage broker you would pay those application fees only one time and the loan package could be sent multiple lenders. Also, a good broker will always shop your loan to multiple lenders in order to get you a better rate. A bank would never shop your loan to another bank!
Remember, in terms of which way rates are going to go, neither bankers nor brokers can read the future any better than you can.
However there is a way to lock in the best rate and possibly lower it too. Contact a reputable mortgage broker. |
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