Since about 2008, many people have had trouble refinancing due to declining market values, even if they were otherwise qualified. While there are loan programs out there for refinances that will go to 125 percent loan to value, they are restricted in many ways and have not been available to all.
However, many areas of the valley have seen double digit increases in value the last few years, and in the meantime many homeowners have dutifully kept on paying their loans off and have made substantial reductions in the amount they owe. I keep hearing rumors out there that there are mortgages that carry rates in the 5 to 6 percent range, and there might be one or two in the 7 percent range. Most of these folks probably looked in refinancing but thought they didn’t have enough equity or found out they did not qualify under the expanded criteria programs.
Drop Mortgage Insurance?
More importantly, many people who had less than 20 percent down payment when they bought their home and had to get mortgage insurance (an additional monthly charge on your mortgage payment) may be able to drop their mortgage insurance as well as get a lower rate.
How much can a lower payment save you? The answer is it depends, and you need to look at more than just comparing rates to rates. Simply put, if you owed $400,000 at 6 percent in 2008 your principal and interest would be $2,398 per month and after six years you would owe about $365,000 now. If you kept your loan for another three years you would own $334,743.00, which is a good accomplishment — mortgage loans pay off faster the longer you have them. Many people look at a refi and dread starting over on their payments.
But if you took that $365,000 and did start over on your payment plan at 4.25 percent here’s where you would be in three years: First, your new monthly payment would drop by $603 per month to $1,795. That’s equal to getting a second job you never have to show up at and while still getting paid.
In three years, your principal balance would be about $345,728, which means you have lost a little ground ($10,985) in your quest to be mortgage free someday. But multiply the monthly savings and you have reduced your payment by $21,708, putting you $10,723 ahead in the game.
While the monthly math is easy enough to see the benefit, the other side a consumer must examine closely are closing costs, which consist of two sides. There are hard closing costs tied directly to the refi which include an origination charge (if any), and appraisal, credit report, title and filing fees. In addition, there are soft closing costs which are to open tax and insurance escrows and prepaid interest for the balance of the month of closing. Soft costs are, essentially, costs you would end up paying one way or the other. Clearly the focus is on hard costs, and the difference between lenders can be thousands of dollars and that is where the consumer should shop closely.
Key to the Puzzle
Generally, a mortgage broker will be able to offer you more flexibility on hard closing costs than a bank will. This is because a broker can offer you a range of amounts to credit back against your costs depending on the rate you choose. Recently on a $400,000 loan I was able to offer the borrower a $4,100 credit if he agreed to a rate one-eighth percent higher. The increase in payment was nothing compared to what he was saving.
If you still have a rate that has starts with the number five or higher, or you have an adjustable rate mortgage and feel you might have enough equity in your home to benefit from a refinance, then it might be worth tens of thousands of dollars in savings to investigate your options.
Chris Neuswanger is a mortgage loan originator with the Macro Financial Group Team at Mac5 Mortgage in Avon and may be reached at 970-748-0342. He welcome mortgage related inquiries from readers. His website and blog is www.mtnmortgageguy.com.