NEW YORK, Jan. 24, 2008
Time To Refi?
Ray Martin Crunches The Numbers For You, With Rates Falling; Says It Worth Considering!
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Play CBS Video Video Should You Refinance? Harry Smith talks to financial expert Ray Martin about refinancing and crunches the numbers for you. If your credit is good, now is the time to take action.
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The Fed's surprise three-quarters of a percentage point rate cut may give some homeowners an unexpected relief in the form of lower mortgage payments. Homeowners need to get busy thinking about their refinancing options.
Mortgage interest rates have dropped as much as 1.5 percentage points since last fall. Here is a list of current mortgage rates offered by lenders for mortgages that conform to the FNMA lending requirements. This is for mortgage amounts of $417,000 or less, with a loan for not more that 80 percent of appraised value. If the loan-to-value ratio is greater than 80 percent, additional mortgage insurance would apply:
15 year Fixed: 5.0 percent
30 year Fixed: 5.5 percent
5/1 Adjustable Rate: 5.0 percent
10/1 Adjustable Rate: 5.375 percent
Homeowners, particularly those with larger mortgages that conform to certain guidelines, should definitely look at refinancing again, even if they refinanced a few years ago. That’s because the monthly savings from lower interest rates for larger mortgages are greater and can recover the costs of a refinancing transaction sooner. Here’s an example, assuming an old rate of 6.5 percent, and new rate of 5.5 percent, with closing costs of $2,500:
Mortgage amount: $200,000; Monthly savings: $128; Months to recover: 20
Mortgage amount: $300,000; Monthly savings: $193; Months to recover: 13
Mortgage amount: $400,000; Monthly savings: $257; Months to recover: 10
The urgency to refinance now is that if the Fed cuts rates again next week this could reignite consumer spending and these rates will not last. Of course with the U.S. economy slowing, and possibly heading into a recession, that risk seems remote - but we are in uncharted waters and anything could happen. In fact, at the time I was writing this, some lenders sent an alert to their brokers that as the financial markets recovered and investors sold treasury securities, some lenders actually raised their mortgage rates by 0.125 percent!.
This refinancing opportunity will not be available to some homeowners. Folks who have been late on any mortgage payment over the past year will be tagged as “the guy who doesn’t pay his mortgage” and will be rejected for refinancing their mortgage. Mortgage brokers, who this time last year had an array of mortgage products to lend to almost any type of borrower, are complaining that they no longer have mortgage products to offer to homeowners who are struggling and late on their payments.
Some of my contacts in the mortgage industry say they have not seen the credit environment this bad in their 20-plus years in the business.
The bottom line is this: for many people who would have coasted through a refinance over the past few years, there is a new reality. More folks who seek to refinance an existing mortgage with a new one with a lower rate will be faced with tougher requirements on everything from appraisals, credit scores and financial documentation. Here is what you need to know if you are looking to take advantage of these low rates and refinance your mortgage right now:
Covering Closing Costs
Some homeowners mistakenly assume that they would not benefit much from refinancing or that they can’t refinance because they lack the cash to cover the closing costs. Here are a few strategies to consider:
If refinancing makes financial sense but you can’t make the move because you are strapped for cash to pay closing costs, consider rolling the closing costs into the new mortgage. The result will be slightly larger mortgage amount owed but smaller monthly payments. Then use the savings to make additional payments against the mortgage to pay it down to the original balance.
You’ll need to compare the monthly savings from lower payments to your closing costs to determine if you will recover your closing costs before you sell your home or otherwise pay-off your mortgage. If you haven’t yet recovered the costs of your last refinancing, you’ll need to figure that in as well.
Refinancers should also read your current mortgage note carefully to determine if any penalty applies for prepayments. Typically prepayment penalties can apply in the first three years and can be as much as six months interest on the original amount of the mortgage - on a $200,000 mortgage, that can be over $6,200.
If you’ve been paying property taxes and homeowners insurance directly, consider using the lenders escrow payment services - some lenders will pay .5 to 1.5 percent of the loan amount towards closing costs if you agree to use their escrow services for payments for taxes and insurance.
In some states, such as New York, a mortgage tax of one-half to three-fourths of a percentage point applies for new and refinanced mortgages. The way to avoid this cost for refinanced mortgages is to assign the mortgage to the new lender and have them modify the rate and term to conform with the new mortgage terms they are offering.
15 Year Mortgage Strategy
If your ultimate goal is to save money over the life of the loan, consider a 15-year mortgage. Interest rates for 15-year fixed rate mortgages are about 5.0 percent; or one-half percentage point lower than rates for thirty-year mortgages. Since the mortgage will be paid off over 180 months, the payments will be more, but the savings are considerable.
Homeowners that like the concept but need the flexibility of the lower payments on the 30-year mortgage can accomplish almost the same results by taking out a 30-year mortgage but making the larger payment required for a 15-year mortgage. If they do this, they can pay off a 30-year mortgage in about 16 years. If cash flow gets tight, they can fall back to the lower payment required by their 30 year mortgage, and increase payments later when they can afford to do so.
If the Fed lowers rates again next week as expected, some mortgage lenders may again be overrun by a surge in volume of refinancing requests. This can delay the closing process and cost borrowers in the form of lost interest rate locks resulting in the risk of higher rates than originally agreed.
If you are refinancing, you can help to avoid the cost of delays by asking for a 90-day rate lock, get your documents, application and tax records together and submitted as soon as possible. If your lender allows, make arrangements to schedule the appraisal and close with a local attorney you have used before.
Need advice from Ray? Write to him!
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