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Updated:         June 5, 2018

Borrowers most often think of refinancing when interest rates start to decline. While there is always optimism that interest rates will decline in the future, the fact is that no one knows for sure if rates will actually go lower or how long any downward trend might continue. The optimum time to refinance is when the savings is sufficient or there is an appropriate reason to do so. Waiting for rates to improve seldom pays off.

It can make good economic sense to "evaluate" your particular situation and determine whether a refinance loan should be initiated. While there are loan programs that now allow a refinance with as little as 5% equity remaining in the property, these are not necessarily advisable for everyone. It is important to acquire competent guidance in determining at what interest rate and under what circumstances it might make sense to refinance.

THE "COMFORT ZONE" REFINANCE: The decision to refinance is an easy one if you currently have a high interest rate and a refi will significantly reduce your monthly payments. It is a more difficult decision for those who have some form of an adjustable rate mortgage, but who would like to acquire a more predictable fixed rate loan. We call this latter situation a COMFORT ZONE refinance because it is unlikely that the borrower will save on monthly payments, but will feel more comfortable getting out of the adjustable loan situation.

This is particularly true if one has a "negatively amortized" adjustable rate mortgage. If you have sufficient equity, it can be a good time to STOP THE EQUITY EROSION on a negatively amortized ARM via refinancing to a fixed rate loan or reduce a current fixed rate. The need to acquire cash from one's present equity can be another unique situation that requires counseling to determine the best way to extract the needed funds.

Under all refinance circumstances, there are a few general considerations:

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.

WHAT IS THE AMOUNT OF REDUCTION IN THE NEW LOAN PAYMENT? An old rule of thumb suggested that the new interest rate should be a minimum of 2% less than the current rate and that refi costs be recouped within 24-36 months. Because of the longer time periods for which we retain our homes, this arbitrary rule may no longer apply. It is advisable to review the terms of your current mortgage to determine if a refinance may make sense. Of course, the 2% rule will definitely not apply for those doing a comfort zone refinance.

BENEFITS OF FHA/VA RATE REDUCTION REFI'S: Those who have current FHA or VA loans may benefit from a Rate Reduction Refinance (RRR) in which the interest rate can be reduced without the borrower having to requalify for the loan or acquire an appraisal of the property. This latter aspect of the RRR loan is most important when the subject property may have declined in value and/or may not appraise sufficiently to allow a more conventional refinance loan. With the increase in home values, it may be the time to explore the opportunity to do a RRR. It is important that borrowers using the rate reduction refinance option understand the concept of rebate pricing.

"NO COST" OR REBATE PRICING: In all refinance loans, the closing costs can be absorbed via "Rebate Pricing". Sometimes known as "no cost loans", this option should be examined carefully. While the initial reaction might be "what have we got to lose", there are circumstances where it might be better to incur the refi costs in the loan and acquire the lower interest rate for the longer term. Analyzing your personal situation will permit you to decide which is best for you.

THROWING THE DICE CAN BE FATAL: Just as we can not know for sure if rates will decline, we can never be sure how low they might go. A fatal mistake for many refi'ers is that they wait in an attempt to get the very lowest rate. Rates tend to decline slowly and increase rapidly. While a refinancer is waiting in hopes of acquiring the very lowest rate, the rates can suddenly spurt back up. The moral is. . .accept a "good" rate rather than continuing to "throw the dice" in hopes of getting a "fantastic rate".

The trick is to be prepared with your loan paper work and be able to take advantage of the market position at any given time. It is easy to miss the lower rate while one is completing the loan application and accompanying paper work in an effort to "lock in" the rate.

DETERMINING IF YOU SHOULD REFINANCE: Now, for determining if refinancing will work for you. Firstly, determine the remaining balance due on the loan(s) to be refinanced. Next, consider the estimated closing costs...these can easily be under estimated. Seek help from your local lender, if necessary. As long as there is sufficient equity available in the property, these costs can be included in the loan amount to be refinanced. Finally, determine the new payment so it can be compared with the current one.

Subtract the new loan payment from your existing payment. Now, divide the estimated closing costs by the monthly payment savings to determine the number of months required to recoup your costs. For example, if your estimated closing costs are $4000 and the monthly savings is $125, it will take 32 months to get back the closing costs. If you intend to sell the property in less than 32 months, the refinance might not be economical.

You are the only person who can make the final decision as to whether a refinance of your present home makes sense. A lender can help you by calculating estimated closing costs, alerting you to current interest rate trends and helping to analyze your particular situation. A loan file can be initiated with little or no cost and you will be ready to save money via a refinance when the interest rates reach your desired level.

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