Mortgage Matters: To refinance or not to refinance, that is the question (column)
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 be back to a more predictable pattern, I am continually proven wrong. Consider the following factors: the U.S. economy is on much better footing and more solid than it was in 2016, The Federal Reserve Board (The Fed) is slowly increasing short-term interest rates, the Fed has ceased its purchasing of U.S. mortgage-backed securities, and U.S. equity markets are at historical highs.
All of these factors would traditionally lead one to believe that long-term interest rates and mortgage rates are increasing in unison.
Historic Low Rates
However, this is simply not the case. Both foreign and national investors (aside from the U.S. government itself) have continued to purchase U.S. mortgage debt and mortgage-backed securities for the perceived security of the investment. Such continued investment actions have helped keep mortgage rates at near historical low levels. As of the end of November 2017, rates on the highly sought-after 30-year, fixed-rate mortgage remain in the low 4 percent or high 3 percent range for the right set of circumstances.
But just because a borrower can refinance his or her mortgage does not necessarily mean he or she should refinance.
When I begin to look at 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 into account what the borrower is trying to accomplish with the refinance and whether or not these goals are feasible. In order to try to 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 and 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 his or her 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 and proceeds out of the house in the transaction.
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 firstname.lastname@example.org.