DesPortes: To refinance or not to refinance, that is the question (column) | VailDaily.com

DesPortes: To refinance or not to refinance, that is the question (column)

William A. DesPortes

While the title of the column may not be William Shakespeare’s exact words, the question is still a good one in the volatile and erratic mortgage market and interest rate environment. As I have written about and discussed with many friends, clients and colleagues, I have ceased making predictions about where mortgage rates will go. It seems impossible to know if we have seen a bottom for rates or what exactly may cause them to go higher.

Just when I think mortgage rates may back to a more predictable pattern, I am continually proven wrong. Let’s consider the following factors. The United States economy is solid and strong with increasing GDP, low unemployment, rising wages and near record high stock indices. The Federal Reserve Board has been increasing short-term interest rates from the lows of really 0.0 percent (late 2015) to the current level of 2.5 percent. The Fed has ceased its purchasing of mortgage-backed securities and its economic stimulus packages. All of these factors would lead one to believe that long-term interest rates/mortgage rates are increasing in unison.  

However, this is simply not necessarily the predictable case. Both foreign and national investors (aside from the U.S. government itself) have continued to purchase mortgage debt/mortgage-backed securities for the perceived security of the investment. Such continued investment actions have helped keep mortgage rates at surprisingly low levels. As of the end of February 2019, rates on the highly sought-after 30-year fixed rate mortgage remain in the low-to-mid 4 percent range for the right set of circumstances which brings up many refinance questions and scenarios.

With the right refinance scenario, a borrower can see substantial gains financially.
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But just because a borrower can refinance their mortgage does not necessarily mean that they should refinance. When I begin to look at a particular borrower’s scenario and the potential for a refinance, the analysis is complex. I start with the existing mortgage(s) and all aspects of the loan(s) such as: the date when the loan closed and the length of initial term, the current interest rate and the initial loan amount, the amount of interest owed from the outset, how much interest is still outstanding, and how much of the principal balance has been paid down. It is of the utmost importance to understand the existing loan before being able to fully comprehend if a refinance is advisable.

Next I take in to account what the borrower is trying to accomplish with the refinance and whether or not these goals are feasible. In order to try and analyze this portion of the process, I need to understand the borrower’s qualification. If the borrower is an existing client of mine, then I can get a good idea of the current qualification criteria with a quick phone call or set of emails. However, if the borrower is new to me, then it is probably prudent that I gather some of the necessary credit, employment / income and asset documents.

Assuming that I have a good idea on the existing lien(s) and the borrower qualification, I can begin to craft new financing options for the borrowers. I can analyze options for the same and even shorter loan terms. I can take a hard look at the interest that may be saved over the life of the loan. If the borrower is trying to reduce their overhead, I look at the reduction and calculate how long it may take to recoup the costs of the loan in the monthly savings.

As values continue to rise throughout the valley, more options are available with the increased equity a borrower may now have. Borrowers can utilize the equity to potentially buy down an interest rate or even take equity / proceeds out of the house in the transaction for numerous other purposes.

A mortgage is no longer simply a debt used to buy a home. Rather, a mortgage is now a key piece of one’s overall financial portfolio. Therefore, the refinance analysis is something that I take very seriously. With the right refinance scenario, a borrower can see substantial gains financially. However, the wrong set of refinance circumstances can also have a detrimental effect.

William A. DesPortes works for Central Rockies Mortgage Corp. He can be reached at 970-845-7000, ext. 103, and williamd@centralrockies.com.