When to Refinance

The source of funds for refinancing is the equity owned in a property. Home equity should be considered as a major savings and should be preserved as long as possible. We all know that it takes years to save the down payment for purchase of property. Making regular and excessive mortgage payments over the years coupled with appreciation of property create the equity that should be considered as a major security and savings for property owners.

Refinancing of the equity should be beneficial to owners. It should be planned to achieve specific objectives and financial gains or improvement. Borrowers should have the required equity to refinance as well as have sufficient income to service their new mortgage loans.

When refinancing, borrowers should be aware of following important factors:

Closing costs

Is applicable to various fees payable by borrower such as escrow, title, appraisal, processing, insurance, interest, lenders fees, origination or points etc. Basically borrowers would be paying similar fees to those that were paid when the property was purchased. Because of larger loan amounts in California due to higher properties values, the closing cost would be a few thousand Dollars. The cost could be either added to the loan amount or paid as out of pocket expenses by borrowers.

Buy down rates

Borrowers could pay additional fees to lenders, equivalent to 1 or 2 percent of their loan amount to significantly lower their interest rates. Depending on interest rates and market conditions, the “buy-down” could be beneficial provided borrowers are not planning to refinance in near future. Generally a “buy-down” benefits borrowers on the long term. However, a careful review would be necessary to determine if buy down would be beneficial and generate significant savings for borrowers.

Pre-pay penalties

Borrowers should make sure that refinancing of their existing loans are not subject to pre-pay-penalty. Generally the penalty is applicable only to the initial 3 years. Depending on loan amount, the penalty could be significantly high. Normally it’s calculated at 6 months of current interest at 80%. However, there can be exception to this rule. It’s recommended that borrowers contact existing lenders to find out about their penalty.

Following are some of the options that should be considered when refinancing.

Refinance, rate and term (no cash-out)

Owners may have a high Adjustable Rate Mortgage (ARM) or high interest fixed rate mortgages. Others may want to accelerate paying off their mortgage by choosing shorter terms such as 25, 20,15 years or bi-weekly payments. Switching ARM or high interest loans to lower fixed rates mortgages, could result in lower mortgage payments and higher
Equity.

Selecting shorter terms or bi-weekly payments, will accelerate paying off the principal and increase equity. Shorter-term loans will require higher mortgage payments. Borrowers should carefully consider the affordability for servicing their new mortgages thus to avoid financial hardship in future.

Special conditions, Refinance rate & term (no cash-out)

Borrowers, who have had their loans for a number of years, should keep track of interest rates especially when rates are dropping. It’s quite possible that rates may have dropped significantly since their last loan. Refinancing at the right time with low interest rates could reduce the terms of loans without increasing payments.

For example, lets assume we have a mortgage for $350,000 at fixed rate of 6.50% for 30 years for which monthly payments would be $2,214. Suppose that the borrower also makes excessive monthly payment of $185 (total $2,397). At end of the 7th year the principal balance should be $297,000. Lets refinance only the principal balance at 5.50% fixed for 15 years. Monthly payments would be $2,426.74 which is only $30 more than above-mentioned payment $2,397. Consequently, borrower has reduced the terms of loan by 8 years and a saving of $212,544 or more. .

Debt Consolidation (refinance, cash-out)

Borrowers may want to cash out to consolidate their high interest bearing accounts such as credit cards, auto loans, installment accounts, home equity or second loans etc. Others may want to pay off student loans or educational cost for family member or pay off medical bills etc. Eliminating the high interest payments versus the substantially lower interest rate would be a major savings. Paying off the debts would improve your credit rating. Also, there is always the possibility that if you had your mortgage for a number of years, chances are that refinancing could reduce monthly payments due to lower interest rates. Nevertheless, the interest for the new mortgage could be tax deductible. Combination of all these points would be a win win situation for borrowers.

Home Improvement (refinance, cash out)

Borrowers may want to cash out for purpose of home maintenance and improvement of their property before selling. Others may want to keep their properties but plans on improvement and additions. However, proper planning and good workmanship should increase value of properties, which could result in higher equity. Major improvements and additions should be made in accordance with local building codes.

If you plan to sell your property in near future, make sure the major improvements and additions are undertaken when the real estate market is strong and sales prices are moving higher. Also avoid excessive improvements compared to other properties in the neighborhood. For short terms refinancing, an ARM loan with no penalty may be beneficial.

With all these factors to consider knowning when to Refinance is something a dedicated mortgage professional can help you with. American Financial Services has been serving California borrowers since 1989. We have many combined years of knowledge and expertise, and we work closely with you to protect and serve the interest of our clientele the “property owners.” To find out more about AFS, simply contact us today for a free consultation of your financial situation, we would welcome the opportunity to serve you. Try our free consultation with no obligation, you will be pleasantly surprised and impressed with our professionalism and integrity.