Many homeowners have opted to make proverbial lemonade from lemons — taking advantage of recessionary low interest rates to refinance their homes.
During the past two to three months, refinances have boomed — for a variety of reasons.
Some homeowners have chosen cash-out refinancing to make home improvements, such as replacing windows, or to pay off a car.
Others refinance to “stay afloat” or to have “more cash in their pockets each month,” said Judy Ingels, certified mortgage lender and vice president of private banking for Rocky Mountain Bank & Trust.
Other homeowners have changed from a 30-year to a 20-year loan in order to pay off their mortgages sooner.
“If you’re currently sitting with an ARM (adjustable rate mortgage),” Ingels said, “you may want to consider a refinance since rates are so low — depending on how long you will stay in the house.”
Or if income has decreased, Ingels said, homeowners with a 15-year mortgage might want to switch to a 30-year mortgage, to have a lower monthly payment.
During the past three months, about a quarter of her refinance clients opted for a cash out, another 25 percent for shorter terms and about 50 percent lowered their payments.
But, she said, homeowners should have at least 20 percent equity after the refinance — to avoid paying private mortgage insurance.
Although homeowners should perform a bit of due diligence beforehand, “People tend to make refinancing more complicated than it really is,” said Gene Mills, certified mortgage lender and president of Central Bancorp’s CB&T Mortgage.
Before speaking to a lender, consumers can perform relatively simple calculations to determine what a refinance will cost, how much they will save on monthly principal and interest payments, and how long it will take to recoup the closing costs, Mills said.
Although closing costs are similar from lender to lender, there are two variables in the cost to the consumer: the mortgage lender’s commission and the margin that the mortgage company needs to make.
Ask yourself, “How does your mortgage fit into your financial situation?” Mills said.
A possible refinance scenario could be a homeowner with an original loan of $225,000 at 6.25 percent, with a monthly principal and interest payment (excluding taxes) of $1,385.36.
Closing costs can be 1.5 percent to 2 percent of the loan. So, at 1.5 percent closing costs, the $228,375 loan, at 5.125 percent interest rate, would be a $1,225.10 monthly payment — a savings of $160.26 per month, Mills said.
Or, the same loan, at 4.875 percent, amounts to $1,190.72 percent — a savings of $194.64 per month.
“That’s money in your pocket for groceries or gas,” Mills said.
Some lenders, including CB&T, offer bundled services, such as a flat-rate refinance. “The lender puts all closing costs into one package, and charges a single fee — depending on the loan size,” he said.
On a $200,000 to $500,000 loan, the savings could amount to between $1,300 and $2,700.
There are three ways for homeowners to pay closing costs. The first is easiest — pay cash up front — but is not an option for many people. The second is to “spread out closing costs” over the term of the loan, that is, add the cost to the principal of the loan. Or, third, the lender pays closing costs, and the homeowner, in turn, pays a higher interest rate — perhaps, say, 5.25 percent instead of 5 percent.
Although interest rates make it an ideal time to refinance, doing so might take longer than it would have six months ago.
Barbara Pattee, president of Springs Mortgage Inc., said the underwriting pipeline is clogged because of recent layoffs in the industry.
“With interest rates at 5 percent or lower,” Pattee said, “there is a huge glut of people who can take advantage of refinancing. The refinance boom is great for homeowners — except those who don’t have at least 20 percent equity in their homes. For them it’s getting more difficult.”
But, Pattee said, interest rates should remain low in the near-term.
That said, don’t wait too long to determine if a refinance is in your best interests.
“Human nature is to hold out for the best interest rate. But if you find an acceptable rate — lock it in,” Mills said. “It’s been relatively crazy for two or three months already — and I expect it to increase.”