Should I Refinance? A Case Study

Thinking about refinancing your mortgage? Unsure how to determine if it is a good idea or not? Three steps can help you decide.

Interest rates remain at historic lows, so for many who haven't refinanced their mortgage recently or have a current mortgage rate above 4.5%, refinancing may be a great financial decision. But how does one determine if now is the right time to refinance?

The first step is to identify your refinancing goals.

  • Do you wish to lower the interest rate on your mortgage or lower your monthly payments?
  • Do you wish to combine a first and second note or a primary mortgage and a home equity loan?
  • Are you interested in paying off your loan more quickly or building equity in your home more quickly?
  • Are you looking to convert some of the equity in your home to cash?

Next is to gather key information about your current mortgage:

  • First payment date
  • Interest rate
  • Beginning loan value
  • Current loan value
  • Current monthly payment
  • Amounts and dates of any additional payments

An important item that may be overlooked in refinancing is that the new loan does come with new closing costs. The closing costs may be paid out of pocket or rolled into the new loan amount. Closing costs for a refinance tend to be higher than for a purchase because you, the borrower, ends up paying for new title insurance. (In many states, it is customary for the seller to pay for title insurance in a purchase transaction.) Some lenders and some title companies will provide a credit or discount to help offset the closing costs.

With your goals identified, your current mortgage information, and a clear expectation on closing costs, you are ready to begin an analysis and make a decision.

You can use online mortgage calculators or amortization tables in a spreadsheet, plus mortgage rates to compare your current loan to a potential refinance. Or, you can talk to me about your goals and receive a customized analysis of your options.

I recently completed a customized refinance analysis for Tom.

Tom's goals are to lower his interest rate and build equity more quickly in his home. He plans to sell his home in 5-10 years and wants to get as much equity as he can on the future sale. Tom had already been paying an extra $100 each month to help with these goals.

I then looked at Tom's credit and current mortgage situation. With excellent credit and current interest rate higher than today's rates, a few scenarios began to emerge for our analysis.

I used a spreadsheet-based amortization table to generate future loan balances, cumulative interest, and pay off dates for three different scenarios: continuation of Tom's current mortgage with the extra payments, a refinance to a 25 Year Fixed Rate mortgage and a refinance to a 20 Year Fixed Rate mortgage.

This analysis indicated that refinancing to a 25 year fixed mortgage may save Tom some interest over the course of the loan, but would not meet his goal of paying off the loan faster. However, refinancing to a 20 year fixed loan would help him pay off the loan nearly 4 years earlier and save $50,000 in interest over the life of the loan. This option clearly met Tom's goals. And if Tom chose to pay extra each month as he had with his current loan, he may save even more in interest, pay off the loan even earlier, and ultimately build more equity more quickly.

Tom found this analysis to be very helpful in making his decision. We discussed all the ins and outs and ultimately he decided that a refinance would help him achieve his objectives.

Refinancing just to capture a lower interest rate doesn’t always make sense. Be sure to understand your goals and analyze your options.

Interested in refinancing? Follow the steps outlined here or contact a mortgage loan officer for a customized mortgage analysis.

Rebecca Thorburn is a mortgage lending expert with PrimeLending, a national mortgage lender, ranked No. 4 nationally for purchase units.Ms. Thorburn uses her mortgage expertise to deliver mortgage solutions to meet individual home ownership goals. She is also a Certified Divorce Lending Professional®, specializing in helping family law attorneys and in helping those in a divorce situation navigate the options and complicated details related to dividing property, managing current mortgages, and preparing for future mortgages. You can contact her on her website.

What the Fed Rate Decision Means for Homeowners & Potential Homebuyers

September 17, 2015 – Los Angeles, CA – Today the Federal Reserve held the federal funds rate at the current rate of near zero, where it has been since 2008.  So what does this mean for those interested in buying or refinancing a home?  In short, if you’ve been thinking of purchasing or refinancing a home, the opportunity to take advantage of low mortgage rates has been unofficially extended.

Though not directly linked, mortgage rates have historically followed the trend of the Fed rate.  When the Fed lowered their key interest rate to near zero in 2008, mortgage rates took a dive and have stayed relatively low ever since, which was good news for those looking for a loan (not such great news for high interest rates on deposits).

Given today’s Fed announcement, mortgage rates are likely to stay low, which means those who are in the market for a home should take advantage of the historically low rates that are still available, but maybe not for long. 13 of 17 Fed policymakers still foresee raising rates at least once in 2015 (Source: Reuters).

“Consumers still have time to take advantage of low rates,” says Ray Montague, Director of Product Research at Informa Research Services.  “It’s a great time for homebuyers to lock in a low rate.”

For those who have already bought a home, refinancing your current mortgage at a lower rate can also help cut the cost of homeownership.  Whether purchasing or refinancing your home, securing a low rate can lower monthly payments significantly, quickly adding up to thousands of dollars of savings over the long term.

If Homeownership is one your goals for this year, financing the purchase with a low interest rate can help you achieve this very exciting milestone.  Hurry! Home prices may be on the rise but there are still plenty of opportunities to find well-priced properties.  This decision opens a window for buyers to finance it with a great mortgage rate to get the most home for their money.

For example, the monthly payment on a $250,000 home purchase would be $1,266 with a 4.50% mortgage rate.  However, the monthly payment drops to $1,157 per month at if you can secure a rate of 3.92%.  The 0.75% difference in interest rates could save you $109 per month, which adds up to over $1,300 annually.  Over the entire term of the loan, this accumulates to nearly $40,000, which could be put to good use for a number of projects such a dream vacation, starting a small business, saving for retirement, or maybe even funding a college education!

According to Informa Research Services’, the current national average rate on a traditional 30 year fixed mortgage is 4.04% (Source: Informa Research Services Interest Rate Review).  Since this is a national average, it means that there may be rates significantly higher and lower than this figure.  Nonetheless, it is a good idea to keep this figure in mind when shopping mortgage rates.

One of the best resources to aid in your search for the best mortgage is everyone’s favorite research tool: the internet. Comparison mortgage rate tables are especially useful in finding the best rates in your region for the loan of your choice.

Find the best mortgage rates here.

To Escrow or Not to Escrow?

Like many seemingly simple questions, the answer to the question "should I use an escrow account for my taxes and insurance or manage it myself" is "it depends".

Like many seemingly simple questions, the answer to the question "should I use an escrow account for my taxes and insurance or manage it myself" is "it depends".

In case you aren't familiar with escrow accounts, let's start by defining it. An escrow account is an account separate from but connected to a mortgage loan account where a deposit of funds occurs for payment of certain conditions that apply to the mortgage, usually property taxes and insurance. Generally, the annual amounts of taxes and insurance are divided by 12; this 1/12th amount is added to your monthly mortgage payment and deposited into the escrow account. Then, on the due dates for your tax or insurance payments, the mortgage loan servicer pays your taxes and insurance from the escrow account. Example: let's say your taxes are $12,000 per year and your insurance is $1200 per year. Divided by 12, your monthly escrow contribution would be $1100.

When you select to have an escrow account, generally this account must be partially funded at the time of your mortgage loan closing - three months is the norm. This means that the cash you must bring to the closing includes your down payment, closing costs, and the escrow funding amount.

Many loan types, such as an FHA loan, require an escrow account, as do most loans when you put down less than 20% of the home sales price. Some lenders offer mortgage loan rate discounts if you agree to an escrow account.

Your personal financial situation and habits play a role in the decision as well: Do you earn the same amount of salary each month or do you have variably monthly income (i.e. commission based)? Are you a good saver? Do you prefer to have ultimate control over every penny and every bill or do you prefer having the loan servicer manage bill payment for you?

For those with variable income, who are good savers, or who like control over every penny and bill, it may make more sense to manage the tax and insurance payments on their own, without an escrow account. For those who prefer to have someone else manage paying the various entities (county, city, school district, insurance company, etc.) or a consistent cash flow, an escrow account may be preferable.

The last consideration is whether or not the money you use to pay annual bills can work for you during the year.

Example: David has purchased a home worth $400K, with a 20% down payment for a loan value of $320K. His insurance and taxes are $11,160 annually. His lender has discounted his mortgage loan interest rate by 0.125% to encourage him to use an escrow account.David assesses his options: 1. he can go with the escrow account, 2. he can put that $11K into a CD at 1.3% and earn $145 over a year, or 3. he can put it into the stock market with a goal of earning 5% or $558 over a year. The CD option is not beneficial to David as he would end up "losing" $255 ($400-$145). The stock option may be beneficial to David however, as he could "earn" $158 ($558-$400). However, the stock option has the risks of the market and potentially trading fees.

Still not sure? Your mortgage lender can help you assess the pros and cons for your specific loan and situation.