Mortgage Refinance Information

You Could Save a Bundle. With interest rates at 20-year lows, many homeowners wonder…is it time to refinance my mortgage? No pat formulas exist to help you answer that question. Gone is the old “two-two-two rule” – that you should swap mortgages only if you’ve been in your house more than two years, expect to stay at least two more years, and the new interest rate is two percentage points lower than your current rate. In today’s refinancing scene, there’s no such rule, according to Leonard Lacouture, CUNA Mortgage chief operating officer.

“You refinance when it feels right-when there’s enough economic necessity or enough perceived value in the mind of the consumer.” But usually, you need 20% equity in your house to be able to refinance.

Besides the “when is the right time” question, you face a host of others. Should I opt for a 15 or 20-year mortgage instead of a 30-year fixed mortgage? Or should I go with an adjustable rate mortgage? And what about the no-points/higher-rate loan vs. a loan with points but a lower interest rate? Here’s what to consider to sort your choices.

 Act Now or Later?

As of early spring 1993, the national average interest rate on a 30-year fixed mortgage was 7.6%, down from an average of about 9% a year earlier. No one knows where rates will go. Should you refinance now or wait in hopes that rates may drop further? No one can tell you. Say you trade your 10%, 30-year mortgage of $80,000 for a new one at 7.5% interest. Your monthly payment will drop from about $702 to $560, a savings of $142 a month. If you were to nab a 7% loan some months from now, your monthly payment would drop an additional $27, to $532.

But while you wait, hoping to get the lowest possible interest rate, you’re losing savings of $142 a month. Is it worth saving the not-so-sure extra $27? For every month you delay, you’d have to own your house at least five extra months (beyond the time needed to recover refinancing costs-see below) for the waiting game to pay off. Of course, you’ll be out some money if rates climb rather than fall and you eventually refinance anyway.

Is it worth the gamble? Only you can answer, based on your economic situation and how long you plan to stay in the house.

 What About Refinancing Costs?

The savings come with a price, in the form of refinancing costs. Chief among these are points; a point is equal to 1% of the mortgage amount. For example, two points on an $80,000 mortgage would be $1,600. Other refinancing costs include application fees (also called origination fees), appraisal credit check, title search, and closing costs. Most lenders will allow you to roll some, perhaps all, of your refinancing costs into your new loan. Say the points and other refinancing costs total 3% of the mortgage amount (the average is 2.1%). For an $80,000 loan, that’s $2,400. In the scenario described above, you reduced each monthly payment by $142. That means it would take about 17 months to recoup refinancing costs ($2,400Ö$142 =16.9). If you plan to sell your house sooner than that, don’t refinance.

You may be able to choose between a 7% loan with two points and a 7.5% loan with no points for a 30-year mortgage. Which way to go? The key is how long you expect to stay in the house. Opting for the no-points loan will save up-front money ($1,600 on an $80,000 mortgage). But your monthly payment will go up from about $533 to $560, about $27 a month. After five years you’d save as much with the lower monthly payments as you would by choosing the no-points loan. If you plan to sell your house within five years you’re money ahead with the no-points loan.

 Fixed or Adjustable?

If you plan to sell your house in a few years consider refinancing with an adjustable-rate mortgage (ARM) rather than a fixed mortgage. A typical ARM has a two percentage point annual cap and a 6 percentage point lifetime cap. That means if interest rates rise, your mortgage rate may increase two percentage points a year to a limit of six points. With an ARM of, say, 5%, you’d be assured of low payments the first year. On an $80,000 mortgage, your payments would be about $430 a month. Even if the rate increases in the second year you’d still be getting a good deal at 7%, with your monthly payment up about $100. After that it gets a little dicier. But if you plan to sell your house within a few years you may be better off with an ARM.

Perhaps trimming monthly payments is not your prime motive. If you’re interested in getting the house paid for before you retire or send your kids to college, then a 15 or 20-year mortgage may be best. If your object is to take advantage of reduced interest rates and not to take some money out of the transaction as you refinance, be careful to compare apples to apples. For example, if you’re in the eighth year of a 30-year mortgage, your current loan has 22 years left. Refinancing into a new, lower rate, 30-year mortgage at this point might not save money over time. Ask your lender to help you calculate the cost of your mortgage’s remaining 22 years at the new, lower interest rate. Then you might decide a new 15-year mortgage is a better choice than taking another 30-year mortgage.

It lets you take advantage of lower interest rates and build up savings (in the form of equity in the asset, your house) instead of just spending the difference in mortgage payments. With a shorter-term mortgage your monthly payment may not go down or may rise some-what, compared with what you’re paying for your current 30-year mortgage. But you’ll save thousands of dollars over the loan’s lifetime. For example, for a 30-year mortgage of $80,000 at 7.5%, you’ll pay total interest of about $121,360 (monthly payment $599), compared with about $53,490 total interest (monthly payment $742) for a 15-year mortgage at the same interest rate. But you’d likely save even more, because the 15-year mortgage should cost less perhaps 7% in this example. Total interest would be $49,431 and monthly payment would be about $719. Remember, too, that with a shorter-term mortgage, you build equity faster. If you decide in the future to take a home-equity loan, you’ll have more equity to draw on. And the interest on a home-equity loan usually is tax deductible. If you postpone refinancing your mortgage while waiting for rates to hit bottom you may have missed bragging rights. Don’t pass up the opportunity to save many thousands of dollars in hopes of saving mere hundreds.

 Contact:
Bill Troxel
Mortgage Supervisor
727-471-1335
1-800-382-2400