It’s no secret that mortgage interest rates are at historic lows. Freddie Mac reported on June 3 that the average conventional 30-year and 15-year mortgage rates were fixed at 2.99 percent and 2.27 percent, respectively.
One year ago, the rates were 3.61 percent and 3.18 percent, respectively. As a result of this enticing news, refinancing is on the minds of many Las Cruces homeowners. The decision of whether to take the plunge is a highly personal matter, however, and is specific to each borrower’s situation.
Since there is no such thing as a “one size fits all” reason why one may desire to refinance, the first order of business is to identify the purpose of the refi.
MOTIVATION: Typically, there are three reasons people choose to refinance their loans: Reduce their monthly payment, reduce the term of their loan, or generate cash for planned or emergency expenses such as health issues, financing college costs, adding to or remodeling a home or paying off high-cost debt.
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COST: One of the main considerations is how much the refinance will cost and how long it will take to recoup the investment. Let’s say a person currently has a mortgage of $185,000 at an interest rate of 4.375 percent. If he were to refinance today at 2.99 percent, he would reduce his interest cost by about 1.34 percent, or $2,479 annually. If the price tag to do the deal is, say, $4,000, he would recoup his investment in about 18-months. If he remains in the property or keeps his new loan for at least that length of time, he wins. If he leaves or refinances prior to that time, the switch may not be worth the cost.
TERM: Let’s also say that our homeowner took out his current loan about 5 years ago, leaving 25 years remaining on the balance. If he were to refinance into another 30-year loan, he will add 5 years to his original mortgage. If his goal is to reduce his mortgage obligations, not extend them, he’s better off exchanging his current 30-year loan for a new 20-year product – instantly reducing his mortgage term by an additional 5-years. 20 and 30-year loans typically carry the same interest rate. But because the interest rate on the new 20-year loan will be lower than his current rate, his principal and interest payment would increase by just $101 per month.
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Our borrower could also choose to replace his current 30-year loan with 25 years remaining with a new 15-year loan, knocking a full decade off his loan term. At the 2.27 rate, his payment would increase by $290 per month.
EQUITY: Since our homeowner has lived in his home for quite a while, he most likely has the equity he needs to satisfy lender requirements. Equity is the difference between the value of a home and the amount owed against it. Our borrower will have a much easier time obtaining a loan if he has at least 20% equity – meaning that he will ask to borrow no more than 80% of the value of his home. If he has less than 20% equity, his cost to obtain the loan could rise, perhaps offsetting, reducing or eliminating the benefits the refinance would have provided.
TAX BENEFITS: This is where things get personal. Income tax deductions brought about by paying less mortgage interest could have a measurable effect on one’s tax picture, so our homeowner would be wise to check with a tax professional or an online site such as www.bankrate.com to determine to what extent, if any, the refinance will impact his tax obligations.
It is also important that our refinance shopper does his due diligence and shops carefully for his new loan. Not all shoe stores carry the same shoes, and not all lenders carry the same loans. And, even if two shoe stores happen to carry the same products, they may not offer them at the same price. The same holds true for lenders.
Finally, qualifying guidelines vary from institution-to-institution, so don’t take the word of just one lender. I’ve personally worked with borrowers who have been told by Lender “A” that they don’t qualify, only to be told by Lender “B” that they’re as good as gold.
See you at closing.
Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces. He loves to answer questions and can be reached at 575-642-2292 or [email protected].
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