REFINANCING – LOTS TO CONSIDER!
As interest rates are anticipated to decline borrowers with high rates, some well above 7%, wonder if they should prepare to refinance. While some were told that it would be easy to refinance others were promised a “free” refinance. To compound the confusion, borrowers are receiving solicitation phone calls or mailings “offering” an unattainable low rate. This offer of a bogus rate is not new, it has long been called by loan charlatans as their “get them in the door rate”.
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.
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. For those seeking mostly rate relief, the optimum time to refinance is when the savings are sufficient. As interest rates 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.
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.
Challenges Can Occur: Stumbling blocks can occur with the refinance process.
- Appraisal Concern: A refinance loan will require a new appraisal. The longer one has been in occupancy, the greater likelihood that the new appraised value will not cause concern. Those with shorter occupancy periods must consider:
- Is there sufficient equity to accommodate the inclusion of refinance costs. This can be a particular concern If the original down payment was less than 20%.
- 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 will be lessened. It might be a better strategy to wait until the equity increase allows the avoidance of PMI?
- Churning: 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 is desperate and/or unscrupulous behavior.
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.