Assets & Answers: Refinancing

What is the current rule of thumb for refinancing? When is it worth it and what is the downside?

[adam paull, loan officer, first rate mortgage powered by delmar financial]
Refinancing a mortgage requires a needs-based analysis. Since every financial scenario is unique, there is no one-size-fits-all mortgage transaction. The rule of thumb used to be to refinance only if you can save 1 percent off your current rate. In today’s market, you don’t need to save 1 percent for it to make sense … you only need to save money. Borrowers tend to focus on the interest rate alone, but there are multiple layers that need to be considered. Mortgage insurance premiums have been lowered, terms can be shortened and we are still experiencing near record-low interest rates.

Additionally, savvy borrowers have been looking at cash-out refinances, where you refinance your mortgage for more than you currently owe, then pocket the difference. Borrowers often use the cash-out refinance to pay off high-interest revolving debt, such as credit cards.

Lastly, borrowers should consider how much longer they plan on staying in the home. If a person is moving in the near future, it most likely does not make sense to incur the fees of refinancing. I encourage borrowers to reach out to their local loan officer for a full mortgage analysis.

[mark cooper, vice president, delmar financial company]
The rule of thumb for refinancing really can vary with every client. A lot depends on how long the client intends to retain their home, and much depends on the lender they choose. For example, most of the time I can offer a low- or no-cost refinance option. If it is literally zero closing costs, then even a .25 percent drop in interest rate makes it worth doing.

Most lenders charge a significant amount of closing costs to refinance. When this happens, the rate drop needs to be enough to recover those costs within the first year. Zero out-of-pocket doesn’t mean zero cost. Knowing the terms and costs is crucial prior to agreeing to proceed with a loan.

Also, many lenders will start the loan amortization over at 30 years or 15 years. This doesn’t have to happen, as we can customize a loan term to fit a client’s needs. In other words, if a client has paid three years of their 30-year mortgage, we can offer a 27-year loan to them as an option.

The key is knowing the cost and working with a reputable company. Pick one that is local, well known and has someone who can meet face-to-face. That’s the best way to guarantee a smooth transaction and obtain a fair deal.