When is The Right Time to Refinance a Mortgage?
Since January the Federal Reserve has cut short-term rates by 2.75%, however mortgage rates have gone slightly higher than they were prior to the cuts. Determining whether or not to refinance an existing mortgage takes more than just watching the continuous roller coaster fluctuations of interest rates. It may require detailed analysis of each clients overall financial picture, answering some crucial questions, crunching the numbers and seeking the help of a mortgage pro, and your trusted advisors.
To start with, forget the "2 Percent Rule." New interest rate do not need to be, as they used to say, at least 2% lower than the existing rate to benefit from a refinance. It may surprise you but there are many situations where borrowers have significantly increased their monthly cash flow, and saved tens of thousands of dollars by refinancing to a higher rate! You can achieve this by using the refinance to payoff other high interest rate debt and reducing the term of the mortgage, including the closing costs as well.
For instance, take Borrower A who has 29 years left on a $245,000 mortgage at 7.00% and has $25,000 in other debt. By refinancing the current loan, paying off the credit card debt and financing the closing costs to a 20 year term at 7.25%, Borrower A will increase his monthly cash flow by about $400, and save $60,000 over the life of the loan!
When you are working with a client who is considering refinancing have them get the answers to the following questions:
- How long do they plan, on living in this home?
- How long will it take to recover the closing costs of the refinance?
- How will the cash flow increase by eliminating the Home Equity Loan and other higher rate debt?
- Are there any big expenditures expected in the near future -- home improvements, weddings, investment opportunities or tuition?
The equity in a home should be used as a source for borrowing money. This equity can be considered your clients own personal bank and where they will receive the best terms for borrowing, the lowest rate and the option for long term repayment.
Whether your client is purchasing a new home or refinancing, seek the help of an experienced mortgage professional, who has the reputation as a "Trusted Advisor." Use the Internet as a research tool. Many mortgage web sites, for example, offer calculators to help crunch numbers. There should be little (cost of a credit report) or no cost from the mortgage professional for a detailed analysis to determine if a refinance is a viable option. In addition, I strongly recommend that the mortgage professional work with each client's other trusted advisors such as their CP A and/or financial planner providing them with the details of the mortgage financing. As we all know the CP A or financial planner are aware of each client's specific future financial planning goals and investment strategies and can provide the needed assurance that clients need when making these decisions.
Peter Marino is the President of GreenStreet Financial Group, Inc. a New York State Registered Mortgage Broker, located in Huntington. The Huntington Chamber of Commerce honored GreenStreet as the winner of the 2000 Business of the Year Award for financial services. Peter Marino has over 22 years mortgage-lending experience and can be reached at 631-425-1440, or by their website www.greenstreetfinancial.com. Peter Marino is also an active member in the National Network of Accountants Preferred Provider Network.