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When does it make sense to refinance? March 17, 2008

Posted by shaferfinancial in Uncategorized.
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Several customers have recently asked me to look into a possible refinance.  The ultimate question is when is it appropriate.  The bottom line is that it is very individualized.  The first question you must ask is how long I think I will be in this home?  If it is less than three years then it is rarely in your best interest to incur the cost of a refinance.  So once you have determined your intent to stay in the home over three years, then the next question is how long I intend to have a mortgage?  As you know by now, I encourage my clients to keep a mortgage for life.  However, there are some people that just can’t get comfortable with this.  For them, if they plan to have the mortgage paid off in less than five years, it does not make sense to refinance just to have a lower interest rate for a short period of time.  Yes, it might cost them a few extra dollars if it takes them the full five years, but it is not worth the hassle to go through a refinance for such a small amount.  So the bottom line is that you should refinance only if you plan to stay in the home and have a mortgage for more than five years.

If you are, then you should refinance as long as you can lower the interest rate at least 1/2 point and have enough home equity to use for the expenses.  The first year of a refinance you can deduct almost all of the interest paid, the points, and other expenses.  The longer you have had your mortgage the less interest you pay (in fully amortizing loans).

Finally, one important point.  Underwriting has gotten tougher over the last few months.  So if you can get it done now, then go ahead, because no one knows how much tougher it will get in the future.  This is especially critical if you can foresee trouble in your job, if you are trying to get a reduced documentation loan, or you plan to change your job/career anytime in the future.  

One last word of advice.  Don’t try to time rates! It is close to impossible for anyone to predict rate movements, especially lately.  Don’t play that losing game.  If it makes sense, lowers your payment, and you can get it through under today’s underwriting guidelines just do it. 

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Comments»

1. Chris Burns - March 18, 2008

The mortgage refinancing industry is at a point where the only homeowners that can get a mortgage are the ones with high credit scores.

Being in the mortgage list business I know the sub prime market has dried up and our clients are now mostly targeting FHA and high FICO scores.

2. Bank charges - March 22, 2008

Hi,
I like the way you write about Money, Finances and bank ..Its really different and interesting … keep the momentum going ..I hope this will really going to help me in future while making investments….I have ever been opposed to banks, – opposed to internal improvements by the general government, – opposed to distribution of public lands among the states, – opposed to taking the power from the hands of the people, – opposed to special monopolies,
brilliant. .


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