THINKING OF REFINANCING? IT’S A GOOD TIME TO TAKE A CLOSER LOOK!
January 17th, 2009 categories: Mortgage & Finance
[NOTE: Here is Rob Martinson talking Mortgage & Finance. You can read Rob's previous musings here.]
So you say you want a refi?
With all the buzz in the media, if you own your home, you have to be thinking about a refinance. It’s time toroll the dice and get in the game! 
Home loan rates are at historical lows and if your adjustable rate mortgage (ARM) will soon start moving, it is probably time to consider getting yourself locked into a low fixed rate mortgage while the iron is still hot. OK, perhaps I’m telling you something you already know, so let me go over a few things you may not be aware of. These will help you stay away from potential pitfalls while keeping money in your pocket.
Most important to you should be your new rate. I have heard many different opinions on this, but a general rule that I use is that if you can save .5% at a MINIMUM, it is probably worth doing the refinance, even if you have to foot the bill for the closing costs. The lower interest rate may cost you money up front, but over time, you will end up saving money because of your monthly payment dropping. Another thing to consider is that if you are refinancing out of a low rate ARM, it still may be worth doing, even if the rate goes up. Consider that you have an ARM at 4% right now, but you are thinking about refinancing to a 30-year fixed at 4.75%. Up front, it may sound crazy to do, but in the long run, when your ARM has moved to 7%, you’ll be wishing you had 4.75%.
Next, you have to consider up front cost. I generally do not recommend that people pay points. If you do, you are incurring large fees up front, with very little reward. Further, the tax deduction for paying points on a refinance is minimal (compared to that of a purchase), as the deduction is spread out over the life of the new loan. It can take years to recover the points. While points are unnecessary, there are some necessary evils that do have to be paid that cannot be avoided.
The first of these are lender fees, which tend to be standard regardless of whether you are doing a refinance or a purchase. Title fees also need to be paid, but make sure that you ask your title company for the “reissue rate”. This will lower the title insurance cost by a significant amount. Lastly, there is the fee for tax stamps. The biggest savings you can create on a refi will be by staying with the same lender. If you stay with the same lender, you will not pay any tax stamps in the state of Virginia, as long as your loan amount does not increase from the original loan amount you borrowed. In Northern Virginia, the tax rate is $333 for every $100,000 you borrow, so this is real money!
There are two other items that need to be paid at settlement. First, you will have to set up a new escrow account. A good way to figure out how much you will need is to look at your current escrow account (assuming you have one), and add about another month’s worth to each for taxes and insurance. That will give you a good ballpark. Next, you have to pay prepaid interest through the end of the month for the new loan. That coupled with the interest accrued on your old loan from the first of the month until the day you close will equal about a month’s payment that needs to be paid at the table. Fortunately, once you make this, your next real payment will not be due until the first of the following month. So if you close February 15, your first payment will be due April 1.
All of these closing costs (including the escrow and prepaid interest) can be rolled into the new loan amount so that you don’t have to pay them out of pocket. Alternatively, you can ask your lender for a premium pricing credit. By increasing your rate a little bit, your lender should be able to give you money at the table to offset the closing costs. I find that the vast majority of my borrowers prefer to do the
transaction this way, because if it costs you no money up front, the breakeven point is zero, that is, you start saving money right away. A lower rate with the fees will win the race in the long run, but in an area where the average homeowner is only in their home for four years and change, sometimes you aren’t running long enough to make that happen.
So that’s refinancing in a nutshell. Hopefully you are now well equipped to save some money. Of course, I can only show you the door….
[Rob is like all of our Contributors: easy to talk to, and always happy to hear from our blog visitors! You can contact him at Robert.a.martinson@bankofamerica.com]
