When Refinancing Makes Sense

With interest rates falling, many home owners are wondering if they should refinance their mortgages now or wait for further interest cuts. I like to remind my clients that getting a mortgage is a personal thing in the sens mortgages are given to individuals not to masses. Income, credit, assets, property types and values vary from one individual to another.
Instances when one must refinace:

If you have a balloon mortgage and the term is about to come due, refinancing is requred unless you have the funds available to pay off the loan.

If you have an adjustable mortgage that will reset at a rate above the current market: for exemple is the current rates for a fixed 30 years loan is 5.75% and your ARM will increase from 5% to 7%, refinance now.

If you have a fixed rate that is higher than going rates, you must first determine how much you will be saving with the new rate and the cost of refinancing. Let's say that you have a $300,000 on a 30 years fixed mortgage at a rate of 6.5%. The principal and interest is $1,896.20. If you refinance that balance at 5.5% fixed, the corresponding PI is $1,703.37 and you save $192.83 a month.

The cost of the refinance may be 1% or $3,000 in this case. It will take 15.5 months to recoup the refinancing cost, after that, you will begin enjoying the benefits of the refinancing if you decide to take that route.

If the refinancing involves paying off consumer debt such as credit cards, student loans and may be a car note, then the savings are increased by the cancelled payments. This type of refinancing is called a cash-out transaction because it involves paying off the mortgage and other debt. It is also used for home improvement, etc...

There is no fast rule about refinancing, there are some who espouse the idea that if the rate does not fall by 2%, refinancing is not worth trying. This rule ignores the realities of the individual's needs. Obviously the higher your current is the greater the savings generated by a refinancing.
The case of subprime borrowers differs because most rates were high to begin with and are poised to go even higher when the adjustment comes.

One major factor in refinancing is the property value: new restrictions on maximum allowable LTV, i.e. the loan amount divided by the appraised value of the property, limit refinancing opportunities in a declining market. Many failed refinancings and foreclosures are caused by low appraisals.

Home owners who consider refinancing must look past the low rates brought about by the weak economy and investigate the other factors that play a singificant role in the outcome of the transaction.
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