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Is the Time Right to Refinance Your Home Mortgage?

October 2014

Over the last two years average home values have continued to rise across the United States. In many areas existing homes have gained back at least half the value lost after the real estate bust of 2007 and during the Great Recession. At the same time, mortgage interest rates have stayed within a range of historic lows. During 2013 when rates were lowest, many people with equity in their homes refinanced their mortgages usually to lower payments and overall interest paid. For a variety of reasons, other homeowners sat tight with the mortgages they had. This year, although many economic analysts have been predicting that interest rates will rise more sharply, that has not happened but the potential must be considered. Taking all these factors into account you may be wondering if the time is right to refinance.

Why Refinance? Potential Goals and Benefits

If you have not refinanced your mortgage recently and plan to stay in your home for at least two years or more, then refinancing may offer a way to meet one or more of the following goals.

  • Get lower payments with a lower interest rate. Lowering monthly mortgage payments is a primary reason that many people refinance their mortgages. If you refinance a 30-year fixed mortgage, however, for another 30 years, then you may actually increase the total interest you pay over the course of the loan. To avoid this, refinance for a shorter loan term.
  • Reduce the total amount of interest paid on the mortgage loan. If you reduce the interest rate of your mortgage and opt for a shorter-term loan, then you will reduce the overall interest paid on the loan. For example, if you refinance a 30-year fixed note (with 20 years left to pay) for a 15-year fixed note then typically you will save tens of thousands of dollars on the total cost of the loan though your monthly payments are likely to be larger—how much larger depends on the terms of both loans. So always compare the terms and savings of various options.

    In some cases, if the new interest rate is significantly lower than your current rate, you may save on overall interest even if the refinanced mortgage is for a term longer than the term remaining on your current mortgage. Again, always compare options.

    Tip: If you cannot afford a shorter term loan, then you may be able to use monthly prepayments as a strategy to reduce the overall interest on a longer term loan. Let’s say that you have refinanced your 30-year fixed mortgage into another 30-year fixed rate mortgage. The lower interest rate saves you $175 monthly over your new payment; so each month, you prepay that $175 against the principal of the loan. This technique will reduce your overall interest paid by many thousands, without costing more than the payment under your current mortgage.
  • Pay off the mortgage sooner. Perhaps you would like to pay off your mortgage before you retire or for other reasons, then refinancing your mortgage for a shorter term (for example, choosing a 15 year fixed rather than a new 30-year fixed loan) will enable you to pay off the loan more quickly.
  • Opt for a fixed rate rather than an adjustable rate (or vice versa). If you currently have an adjustable rate mortgage, particularly if it has reset (or is about to reset) at a rate higher than the current mortgage interest rate you qualify for and you plan to stay in your house for more than a few years, then you may wish to opt to lock in current low interest rates for a fixed mortgage.

    Conversely, depending on your needs, you may wish to switch from a fixed-rate mortgage to an adjustable rate mortgage (ARM). There are ARM programs that allow you to lock in your interest rate for as long as the first 10 years of the loan, still have a 30 years amortization and often have lower costs and rates than a fixed rate loan. Be sure to consider these types of programs as you consider your refinance options, particularly if you plan to move within the fixed period of the ARM loan.

Why Refinance?

  • Get lower payments with a lower interest rate.
  • Reduce the amount of interest paid on the mortgage loan.
  • Pay off the mortgage sooner.
  • Opt for a fixed rate rather than an adjustable rate (or vise versa).

What About Refinancing a Mortgage to Consolidate Debt or Take Cash Out for Another Cause?

Using a mortgage refinancing and tapping your home equity as a money management technique may have some benefits in some situations but it can also pose huge dangers to your homeownership and financial well-being. If you want to increase the amount of your home mortgage to consolidate your first mortgage with a home equity loan (second mortgage), then that may make very good sense. Most financial experts however caution against taking cash out of your home to pay off other debt. For example, if you take a cash-out mortgage to pay off credit card debt, then you are replacing the unsecured debt of credit cards with secured debt –and the security for that debt is your home. If for some reason you can’t make the increased monthly payments of the larger, refinanced mortgage, then your home could be in danger of foreclosure. The best advice: Don’t treat your home equity as a piggy bank—that’s what got many homeowners in trouble in 2007-2008 when the housing market collapsed.

Tip: If you were thinking of using cash out of a refinance to buy a new car or pay off a current high-interest car loan, do not pass go but go immediately to the auto loan rates page on your Credit Union’s website. You see right away that current auto loan rates are in general even lower than current mortgage rates. BayPort also has programs to refinance your current high-interest-rate auto loan and potentially save you thousands. Make a call to your Credit Union and check that out.

What Are the Potential Drawbacks to Refinancing

The overall goal of refinancing is to save money on the cost of the money you are borrowing for your home. Some of the drawbacks, such as using a mortgage refinancing to pay for other things, I’ve discussed in the previous section. Here are some other points to consider.

  • Refinancing a mortgage is not free. There are closing costs to refinance a mortgage. So you must live in the home and pay on the new mortgage long enough to recoup your costs. Many lenders who advertise “no cost” refinancing and/or claim they pay closing costs are actually charging the borrower in different ways: For example, the loan may have a higher interest rate or the closing costs are actually rolled into the total amount you borrow. In this last case you pay the closing costs but interest on those costs for the term of the loan.

    Tip: Credit unions typically have much lower closing costs and fewer fees than many other lenders. So start your exploration of refinancing with your credit union, BayPort.
  • If you move before you recoup the costs of refinancing, you will lose money. If you plan to move or have to move before you have recovered the costs of refinancing—on average that may take two to three years—then you will have paid more for refinancing than you saved. This is another reason to check carefully to see how long it will take you to recover the costs. Most refinancing calculators will help you do this.
  • If you borrow more than 80% of your home’s value you may have to pay private mortgage insurance (PMI). Having to pay for PMI adds another cost to refinancing. So be sure you take this into account.

Are there any options if you owe more on your house than it is worth?

If you are still “underwater” on your mortgage, you may qualify for one of several government-supported programs. The HARP 2 Program (Home Affordable Refinance Program) has expanded terms, and you may qualify if your current mortgage was signed/in force no later than May 31, 2009, you are current on your payments, and your loan-to-value (LTV) is 80% or more, and the loan is owned by Fannie Mae or Freddie Mac. You must apply before December 31, 2015.

The Making Home Affordable Program (HAMP) offers a variety of loan modification programs for homeowners in a variety of situations who may have underwater loans. For instance, you can check out programs for FHA or VA loans here.

Start with Your Credit Union to Consider Refinancing Opportunities

Among financial institutions, credit unions have established a history of offering highly competitive mortgage loans and refinancing opportunities and superior customer service. Credit unions are member owned and make members’ financial well-being a priority. I recommend that you begin comparing mortgage refinancing options by talking with a BayPort representative.

For More Information

GetReal Mortgage Guide

BayPort Home Loans

The Federal Reserve Board offers A Consumer’s Guide to Mortgage Refinancings, a fact sheet that includes worksheets and links to calculators to help you compare costs and options.

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