One of the biggest reasons homeowners refinance their mortgage is to
obtain a lower interest rate and lower monthly payments. By refinancing,
the borrower pays off their existing mortgage and replaces it with a
new one. This can often be accomplished with a no-points no-fees loan
program, which essentially means at â€œno costâ€ to the borrower.
the no-points no-fees scenario, the mortgage consultant uses rebate
monies paid by the lender to pay off non-recurring closing costs for the
borrower. These are â€œone timeâ€ fees such as escrow or attorney fees,
title insurance, document preparation, tax service, flood certification,
processing and underwriting fees, etc. The borrower is still
responsible for recurring fees such as interim insurance, property taxes
or insurance policy payments.
Refinancing typically occurs when
mortgage interest rates drop significantly, but borrowers with recently
improved credit scores (from paying off credit card debt, making
mortgage payments on time, etc.) are often candidates for better
interest rates as well. If you havenâ€™t checked your credit score in a
while, itâ€™s a good time to call a mortgage consultant.
The question most asked is, â€œBut why should I go back into a 30-year loan?â€
are two schools of thought on this subject, and the mortgage consultant
should work hand-in-hand with the borrowerâ€™s financial planner to
determine what works best for their mutual client.
One option is
to take the route of the â€œsame paymentâ€ refinance, and actually pay off
the loan faster and save money on interest fees in the long-run. If
refinancing results in a lower monthly payment, the borrower can still
continue making the same payment they made in the original loan, and the
extra money will be applied to the principal balance.
example: Letâ€™s say you have 25 years remaining in your current loan, and
you refinance back to a 30-year loan with a slightly lower interest
rate, resulting in a payment reduction of $200 per month. (Note: This is
just an example. The actual amount could vary.) You could then take
that extra $200 per month and apply it toward the principal on the new
loan. At this rate, the loan will be paid off in 22 years and 4 months,
which is 2 years and 8 months less than the original loan.
other hand, if the borrowerâ€™s financial planner is a proponent of
best-selling author and investment guru Douglas Andrewâ€™s philosophies
(see Missed Fortune), he or she may suggest investing the extra
money in a side-fund that could earn a better rate of return and grow
to the amount of the mortgage (and beyond) in even less time. This
method provides excellent liquidity, but having more direct access to
this money may be too tempting for some homeowners.
the reason for the refinance, the mortgage consultant will need to know
what the existing loan scenario entails, review the homeownerâ€™s
long-term goals, and provide a comprehensive spreadsheet that compares
and contrasts the various loan programs available.
Bear in mind,
refinancing to obtain a lower interest payment could also result in a
lower deduction at tax time. The homeownerâ€™s mortgage consultant and
financial planner should work hand-in-hand with their mutual clientâ€™s best interest in mind.