Although rates have gone up as much as a half point in the past few weeks, there are opportunities to refinance for many local homeowners who could not do so for the past several years due to declining property values.
While the market recovery is still spotty, there are areas and market segments that are up considerably in value from even six or nine months ago. Currently, we are working on several refis for clients that have rates in the 5 percent range on loans they got in 2009 and early 2010 that were excluded from the 125 percent loan-to-value refi programs that required the loan being paid off be originated before May 31, 2009. For those who had loans before that date to get a reasonable rate, one had to be at a max of 80 percent loan-to-value, which was not possible for many years due to sinking property values.
In addition, these people have all been in their homes for many years because they were not flipping houses to make money like many people did prior to the recession, and they will be ready to move on in the next five years or so. This makes adjustable rate loans attractive to them that have a fixed rate of five to seven years.
In some cases, we have seen property values go up a solid 10 to 20 percent since late last year. While values are still far below their peak of 2007, this increase is heartening to anyone owning a home, and it can make or break a deal for refinancing.
Let’s look at an example. Say you took out a loan for $400,000 in the fall of 2009 and you are paying 5.125 percent. Your principal and interest payment is $2,178 per month and your remaining balance is $375,000.
Currently, if you switched the loan to a 7/1 adjustable, then your rate would be fixed for the next seven years at 4.125 percent and your payment would drop by $360. Over five years, you would save $21,600 in payments and at the end of five years you would owe $339,783.
You will be starting over on a new 30-year amortization, which will eat some of the savings, but the difference after five years on the payoff is only $4,180 lower on the old loan as opposed to the new loan. Thus, your net savings will be $17,420. Of course if you stay seven years, then your savings will be greater.
In addition, loans today generally have far less closing costs than the last loan you probably took out. Depending on the rate and the lender, you can often get a substantial credit toward your hard closing costs of an appraisal, title work, underwriting and filing fees. In some cases there may be zero closing costs.
Appraised values are still a bit unpredictable, and you may end up paying for an appraisal and being unable to refi because of a nearby foreclosure or short sale recently in your area that brought down the value. Also, appraisers have to go off comparable sales that are very close in overall scope to your home. They cannot use properties that are listed for sale, or ones that are far larger of smaller in size.
At our office, when we get a request for a refi and we feel loan-to-value may be an issue, we do try and research possible comparable sales that we think might be a good indicator of the value and only encourage the client to proceed if we feel there is a reasonable chance we will be able to get the appraised value in, but admit we are not appraisers and sometimes we miss the mark (or the appraiser misses the mark!).
If you think you could benefit from a refi, then it’s best to check with a local lender and run some numbers to make sure it makes sense.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage related inquiries from readers.
Loans today generally have far less closing costs than the last loan you probably took out. Depending on the rate and the lender, you can often get a substantial credit toward your hard closing costs of an appraisal, title work, underwriting and filing fees. In some cases there may be zero closing costs.