REFINANCING – LOTS TO CONSIDER!
Borrowers expecting interest rates to decline have been disappointed that rates have remained stubbornly higher than anticipated. While waiting for rates to come down, borrowers are wondering if this is the time to refinance or, at least, prepare to refinance. Some borrowers who purchase when rates were high (over 7%) were told that it would be easy to refinance others were promised a “free” refinance. To compound the confusion, borrowers are now receiving solicitation phone calls or mailings “offering” an unattainable low rate, no-cost refinancing or easy qualifying. This offering of a bogus rate is not new; it has long been called by loan charlatans as their “get them in the door rate”. Understandably, borrowers are frustrated and anxious to reduce their interest rate. But there is more to consider than merely acquiring a reduced interest rate.
Before continuing, let us be very clear – we are anxious to help anyone and everyone obtain a lower interest rate but it has to make financial sense. There is more to consider beyond just acquiring a lower interest rate. The following are some things to consider when evaluating a refinance transaction.
When should One Refinance: Every situation is unique and personal. For those seeking mostly rate relief, the optimum time to refinance is when the savings are sufficient. When interest rates eventually trend downward, it is difficult to know exactly when to refinance. Waiting for the very bottom of the rate decline could result in disappointment because no one knows where the bottom is or when we will reach it.
The Borrower Has to Re-Qualify: A borrower’s financial situation may have changed since they purchased. Credit scores may have reduced. The accumulation of additional consumer debt may have occurred and accompanied by a possible change in income, accelerating qualifying ratios may prohibit a refinance. It is recommended that a borrower acquires a personal pre-approval before entering the refinance loan process, acquiring an appraisal, etc.
And Then There Is the Equity Situation: We have depended upon home appreciation rates to increase a home’s value in readiness for a refinance. If the original purchase was completed with a minimum or low-down payment (or with downpayment assistance) there may be insufficient equity growth to accommodate the inclusion of refinancing costs and/or avoid Private Mortgage Insurance( PMI). This can significantly affect borrowers with short-term occupancy periods.
The Private Mortgage Insurance (PMI) Conundrum: If the original loan included PMI (was purchased with less than 20% down payment), is there now sufficient equity to avoid PMI with a refinance? If not, the benefit of the refi could be significantly reduced. It might be a better strategy to wait until the equity increase allows the avoidance of PMI.
Appraisal Information: A refinance loan will require a new appraisal that is required to be obtained via the lender’s Appraisal Management Company (AMC). In preparation for a refinance, obtaining accurate estimates of value is recommended but avoid obtaining an actual appraisal.
Refinancing Can Be Costly: The fees accompanying a refinance can be substantial. These costs can be accommodated in several ways – the borrower can pay them out of pocket, they can be absorbed within the new loan balance or paid by what is called rebate pricing.
- Paying in cash: Few borrowers select this option but it would maximize the savings to be achieved via the refinance.
- Including costs within the new loan balance: Most borrowers prefer this option because it allows for acquisition of the lowest interest rate.
- “No Cost” via Rebate Pricing: The “no cost” assertion of this option is false as the fees are paid via the borrower accepting a higher than market interest rate. This results in the lender acquiring a rebate from the market with which the fees are paid.
- The Free Refinance Hoax: A “too good to be true” promise. The uninformed borrower will not be offered the lowest rate when seeking to refinance but will pay the fees via the lender’s rebate.
How Long Do You Intend to Stay in the Home: While no one can know for sure, it requires some period of time to recoup your refi costs. The longer you remain in the property, the more economical the refi will be. Because of the longer time periods for which we retain our homes, refinancing can be beneficial but still must be individually evaluated.
Evaluating the Benefit: The economic value can be fairly easily quantified, but there may be other appropriate reasons for refinancing. The period of time to recoup the financial costs can now easily exceed 36 months. Whatever the time required, it should be less than the expected period of continued occupancy (noted above). If the refinance was for other reasons cash-out, for instance) the benefit will be evaluated differently.
We Don’t Believe in Churning Loans: This phenomenon most often occurs with government loans (FHA & VA) and is known as streamline refinancing but can also occur with conventional financing. Some loan lenders suggest that the use of rebate pricing (noted above) allows for a “no cost” loan and even if the savings are very minimal they ask “what do you have to lose”? The loan officer acquires a big paycheck while the borrower obtains minimal relief or savings. We believe this at least borders on unscrupulous behavior.
Additionally, nearly all lenders have requirements that discourage a refinance until at least a six-month period has elapsed. Although this may not directly prohibit a borrower from proceeding, it can have serious financial consequences for the original lender. Most honest and conscientious lenders adhere to the six-month rule before accepting a loan and placing a fellow lender in economic jeopardy. But some do not.
Throwing the Dice: Depending upon the motivation for a refinance loan, determining when to act can be difficult. While we know that rates tend to reduce slowly and increase rapidly, we do not know how low rates will go nor for how long they will remain there. Waiting to obtain the very lowest rate can result in disappointment. The moral is “accept a good rate rather than gamble on obtaining a fantastic rate”. If one is serious about seeking refinancing, the real trick is to BE PREPARED. Contact your lender, initiate a loan application and all the accompanying documentation so that you are ready to take advantage of the market position at any given time.
In Closing: The borrower is the final decision maker regarding refinancing. But we urge that the decision be made with competent counsel to help calculate the anticipated saving and analyze one’s resources and ability to proceed.
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