UPDATED: Should You Consider Refinancing Now?

The most interesting financial product to come out this week is a 1,5, 7, or 10 year interest only loan (becoming fixed at the end of the interest only term, due in 30 years) that gives you the option of converting to a 30 year fixed, with no points, at prime rate, at any point after 12 months, but during the first 5 years of the loan (up to month 60.)  There is no reapplication, appraisal, or title insurance necessay; in other words, it is a built in modification of terms. (The loan term does not readjust; your term will be set at any portion of the loan still remaining.  i.e., if you modify @ 12 months, your fixed rate loan would have a term of 29 years) If you were converting that loan today, you would be getting a 30 year fixed rate loan at about 4.78%.  This product is available for jumbo loans as well.  This is one of the best options I’ve seen in a long time, and could be a real value if you are considering a refinance now.  If you are, read the rest of the post below.  Questions?  Contact us at The Bremner Group, 310-571-1364.

There is a silver lining to the cloud of uncertainty out there in the world of real estate. Buying and selling houses may be fraught with difficulties, but when it comes to refinancing, if you plan accordingly, you’re likely to come out way ahead in the current financial landscape. Certainly, the interest rates are worth looking into right now: at this writing, they are at record lows, and holding. Meeting with the senior advisor at California Association of Realtors (CAR) this week, his conclusion is that rates will stay down until mid-summer, and then begin to rise as the flood of foreclosures is stemmed.

In fact, despite refinancing recently declining to a 16-year low, Steve Eckhoff, a mortgage broker associated with The Bremner Group, is reporting that he is working diligently to keep up with the potential clientele. His pipeline of active applications has nearly quadrupled within the past month, with 80 percent of applicants looking to refinance.

Steve maintains that “with rates being low, everyone should be checking to see if they can improve their mortgage and monthly outlay.” He then answers the question everyone asks: “Yes, credit standards have tightened but it is not as hard as many of the news stories would lead you to believe.” (I had my meeting about a refinance just this week!)

Still, if you’re considering it, it’s a good idea to get a sense of what you’re about to get into. After all, refinancing hasn’t changed that much over the last couple years, but in subtle ways it’s harder, and more expensive, to refinance a house than it used to be.

Ask yourself some questions.

You can save some time and disappointment if you first evaluate your personal situation before meeting with your mortgage broker. First, check with your accountant, and get their advice.  Then, shop for a broker, not for a loan.  Why?  Your focus should shift from shopping the price of the mortgage to shopping for the best broker.  The broker will shop the market for you.  Brokers shop lenders far better than you can, among other reasons, because they are in constant contact with many lenders, and know the niches where your situation fits. Then, ask yourself these questions:

How’s my credit score?

“If your FICO score is 740 or better, you’re golden,” says Eckhoff. “The next levels are generally at 720, 700, 680, 660, 640 and 620. You will find increased pricing for a given interest rate at these scores.”

But while 740 and above is the sweet spot, especially if your loan will be purchased by Fannie Mae or Freddie Mac, refinancing is worth investigating even if you have a credit score of, say, 620. Don’t get your hopes up, but many of the local and regional banks around the country still provide mortgages with competitive rates and often lower to borrowers that can’t meet these 740 credit score standards. In addition, you may be able to get an FHA-backed loan where rates are only about one-fourth point higher than non-FHA and you don’t need to have a good credit score, and they will provide financing sometimes as high as 96.5 percent.”

What’s the value of my home?

This is probably the biggest issue right now.  (read my blog post about appraisals and the lack of comps.) You need to make sure the new loan balance will be equal to or less than 80 percent of the value of your home. Otherwise, you will be required to pay private mortgage insurance (PMI), which could wipe out the monthly savings of a lower interest rate. Your Realtor® will be able to get you a ballpark value on your home. A lender may also be able to obtain a ballpark value for you. It’s possible to go much higher on the loan-to-value ratio, but it should make sense for you to do so.”

How long have I been at my job?

If the answer is less than two years, know from the outset that the process will be more difficult for you.

Why do I want to do this?

If you want to refinance in order to take cash out, experts generally agree: Now is not the time, especially in this economic climate. Don’t ‘cash out’ in this market. Instead, only refinance if you can reduce your interest rate enough. In other words, you should only do this if refinancing is going to significantly lower your monthly payments.

What will I gain by doing this?

Typically, most experts agree to shoot for reducing your interest by at least one point; if someone tries to convince you that it’s a financially wise move to spend thousands of dollars in closing costs to bring your 6.5 percent interest rate down to 6.25 percent, this is probably not someone who is looking out for you. You should only consider refinancing if you plan to be in your house at least another 18 months to two years, because it almost takes about that long for the monthly savings from the lower interest rate to offset the transaction costs of your refinance.

Get your paperwork in order

You’re going to need to find every bit of paperwork that shows the worth of your house and what revenue you and, if you have one, your spouse are contributing to your budget. Gone are the days of “stated income” or no documentation loans.  Locate the following documents to submit to your lender:

The past two years of W-2 statements

   30 days’ worth of pay stubs

   The most recent two months of all bank accounts, retirement accounts or other significant holdings

   Copy of driver’s license

   Copy of Social Security card

   Proof of homeowner’s insurance

Take a look at your budget, and your calendar.

If you’re going to refinance, you want to do it as soon as possible, in case rates go up. But at the same time, if you’re planning a wedding that’s going to happen soon, if your baby’s due any week now or if this is just a really busy period in your life, remember that time doesn’t stand still when you’re refinancing.

Most rate locks are only good for 30 days. With the current market, underwriting now takes about 10 business days. Keep this in mind when trying to calculate a closing schedule.

That’s not the only thing you should be calculating. As the rates have gone down, the fees have gone up, including loan origination, title insurance, underwriting and document-processing charges. Typical closing costs for any mortgage, whether refinanced or a completely new one, have been around $3,000 and can run as high as $4,500. Points, based on the amount you refinance, will cost about 1 to 2 percent of the loan amount.  And because the lender can’t always know what these fees are in the beginning, you should ask for a “good faith estimate,” which they’re required by law to provide within three days. Generally, those fees are often still rolled into the loan (which makes the monthly payment higher than it would be if you pay the closing costs upfront), but lenders are starting to ask for the appraisal costs up front, a fee that’s usually around $500-$750.

Like homeowners, lenders are now looking to protect themselves. They want to see that the borrower is committed to following through with repaying this loan. Commitment, in fact, is why it’s so important to be prepared. Understanding what you’re getting into is the key to emerging from the refinancing process a happy, healthy and wealthier person.

NOTE: Homeowners should seek professional advice based on their particular circumstances. This article is for information purposes only and is not is not to be substituted for the advice of your lender, accountant or tax professional.