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Raleigh Mortgage Blog- Jim Enright

Pay Less and Save More

By Jim Enright | Mortgage Broker
or Lender in Chapel Hill, NC

Home Not Sold? Home Mortgage Refinancing |Raleigh 27517|Durham 27706|Chapel Hill 27517|Chatham|NC|

Here’s the basics of Home Mortgage Refinancing in the Triangle, NC. If you know you will be staying in your home another few years <less than 7>, before you move, there are real opportunities to reduce your mortgage payment and build savings for the down payment on your next home.

When Should You Consider Home Mortgage Refinancing?

There are many financially sound reasons to consider when refinancing a home loan. Think about what the “end result” you want when your mortgage refi is completed. Was it to lower your monthly payments so that you could save more,  or, to send your children to a different school? Was it to shorten the length of your mortgage so that it retires when you do?

Refinancing a Home Mortgage falls into these categories -        

-          Lower your monthly mortgage payment? This is known as a “rate and term refinance.”

-          Shorten the amortization term, that is pay off a Fixed 30 year mortgage in 20 years?

-          Get cash out of your home equity? This is known as a “cash out” refinance.

-          Refinance with home equity loan and combine into into one loan?

-          To drop mortgage insurance if you’ve had appreciation?

-          Divorce - Remove a spouse or co-borrower from the loan?

Myth

-          Some borrowers still hesitantly ask about the old rule of a minimum 2% rate savings before they refinance their current home loan. That rule is no longer valid, and should be totally removed from the psyche of mortgage refinance conversation. 

Refinancing a Mortgage rate for a savings of as little as .25% does make sense under the right circumstances. Those circumstances are:

-          Closing cost breakeven time.

-          How long you will keep the property (not how long you will live in the home)

Think of it this way -  

Do you or your spouse ever use coupons, grocery, restaurant specials, tire specials, Buy 2 get 1 free  or other incentives to save money for you (and get you in the door for the business owner)?
What was your biggest purchase savings using a coupon or special? I’m going to guess, a lot less than $100.00.

Now, let’s say a mortgage refi could decrease the monthly interest you are paying on your mortgage by .25% and that you will keep your home for at least another five years. And, that your closing costs (not escrows for taxes and insurance) are less than $500.00.


.25% interest savings on a $200,000.00 loan is $500.00 per year.
.25% interest savings on a $400,000.00 loan is $1,000.00 per year.
.25% interest savings on a $600,000.00 loan is $1,500.00 per year.

Small mortgage rate savings add up to big dollar savings.

This does not include the faster loan amortization you will have with a lower rate.

What are the down sides of refinancing a home loan? A common objection is starting your mortgage over at the same term – ie- a new 30 years mortgage when you have already lived in your home for four years. There are two solutions to that though. Shorten your mortgage amortization by 5 years. Instead of a Fixed 30 year rate mortgage refinance, consider a Fixed 25 year rate mortgage refinance. Or, keep your principal and interest payment the same on the new loan as the old loan.

What are your Mortgage Closing Cost Options?

There are three options with mortgage rates and closing costs:

1-      The “lowest rate” which has the highest closing costs. This would be a 1% origination fee (or partial origination fee) and closing costs.

2-      A “low closing cost” loan, which is a slightly higher interest rate with NO origination fee, or a very small origination fee.

3-      A “no cost refinance” home loan – here, you deliberately increasing your interest rate so that the closing costs can be paid by the lender. Your loan principal balance stays very close to your loan pay off balance. Closing costs are not added to your loan pay off.

IMPORTANT: Remember that in any mortgage closing cost scenario there is no free lunch. You are paying, even if the “lender” is paying closing costs. YOU are paying with a slightly higher home loan mortgage interest rate. The lender is “passing through” the additional funds paid to them to pay your closing costs.

What Appraisal Problems Could You Face When You Refinance Your home?

1-      Your home may not appraise high enough. That is, you put 20% down when you originally bought your home and now, you have 15% equity.  This could trigger having private mortgage insurance or a 2nd mortgage.

2-      If you have a Home Equity Line, and your goal is to combine it into one loan, you may only be able to refinance the existing first mortgage, and keep the home equity line as is.

3-      Worse case, you have no home equity.

You can get a somewhat close idea if you use multiple online home valuation sites. Do remember that property values are local, and may not be accurately represented though. A local appraiser will be the one who will know the nuances.

Should you lock your mortgage refi rates, float, or wait for rates to go lower?

This depends upon your tolerance to risk, market knowledge, and time you have to invest to watch the market.

Mac Smith was a co-worker and bond trader in a former career. We were having the “lock or float” conversation. He was the first to introduce me to the term that “pigs get fat, Hog’s get slaughtered” wisdom. 

There have been many times clients have waited to lock only to find they have gone up, increasing their payment if a purchase or delaying a refinance because they missed the advantage window. 

Another mortgage friend in New York asks his clients: Which would make you feel worse – if you locked your rate, and rates went down the next day, OR if you floated your rate, and rates moved up the next day? 

Mortgage rates change daily and can change multiple times during the day. Think of rates in a 30 day period like a kid walking down the street playing with a yo-yo…up, down, up, down, up, down.  There can be periods of stability that may last for hours, days, or weeks in rates that lull borrowers into a sense of security that rates will stay at those current levels.

 Home Mortgage Rates change daily and can vary like a yo-yo.

 

There are a couple of golden rules to be aware of considering locking or floating mortgage rates:

1-      Don’t fight the rate trend. If rates are trending up, lock. If they are trending down, you can consider floating a bit.

Know the mortgage rate trend and go with the flow.

2-      Bad world economic news and events cause the financial markets to react and can give a very short window of opportunity – hours or a day, to lock a lower rate. If you wait to think about it over night, you will find the potential gain has evaporated back into the market.

3-      If you hear in the media that “rates have dropped” or “rates have risen”, it’s already too late. The media is 24-36 hours behind the reality that a loan officer is seeing at their desk.

 You can use this refinance mortgage calculator to compare four loans:

Questions? You can contact Jim Enright here.

 

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