Does it Make Sense to Refinance Now?

I am probably the only person in our country that hasn’t refinanced in the last 5 years. Seven years ago, I refinanced to a 10 year interest only loan being a firm believer in paying as little into a mortgage as possible instead investing the difference into stocks, bonds, mutual funds and all the investments we provide our clients.Market growth historically far exceeds growth in homes so a 5.85% mortgage with livable caps built in beyond the 10 year period made good sense then.  Equity checks into homes but is nearly impossible to check out without equity loans.Further, my wife and I envisioned building a smaller, customized home that met all of our wants and needs as we headed towards retirement. Well, we all know what happened next. The largest housing bubble ever has changed home values causing some to be upside down or as in our case, a home appraising for much less than it did in 2007. Like many of you, our 10 year plan is still in effect, but has been extended to when housing prices return to some semblance of true values. Reevaluating our current mortgage certainly makes sense considering 30 year loans are 3.75% and 15 years are at 3.25% (accounting to rates listed on bankrate.com as of 6/8/2012) . The keys to making a change for us would be the same for you contemplating the same thing.

  • How much will it cost you?  With your house potentially being worth less than the appraised valued in 2005, your Loan to Value (LTV) amount might be less meaning that you would have to use assets to make the loan work.  Does using an asset that is designed to grow more than a home’s appreciation potential make sense in order to pay less monthly mortgage, potentially less mortgage interest over the loan’s lifetime and lock-in your rate for 15-30 years?  This calculation can be achieved by doing some simple math by assigning a conservative rate of return (ROR) to the assed used to pay for the lowered LTV.  Add that ROR to the asset over a number of years.  Then subtract the lowered mortgage payment from your current payment and divide that number into the number above to see how many months/years before the difference in payments equals the investment + ROR.

For Instance:  Current Mortgage rate on $225,000 = 5.25% for a 30 year mortgage which a payment of $1380 (according to ww.morgagecalculator.org).  Proposed Mortgage rate = 3.68% - 30 year mortgage payment is $1147.Should you choose the new mortgage, your savings would be $233 per month or $2796 per year.

If your new LTV requires you to put an additional $20,000 into the refinancing and you assume a 5% ROR as the loss of opportunity on that capital, the $20,000 would be worth $39,598 in 14 years ($20,000 x 5% compounded for 14 years).

So, in this example, It would take approximately 14 years for there to be a breakeven should your LTV out of pocket be $20,000 ($2796 x 14 years = $39,144 vs. $39,598 capital investment earning 5%).

  • How many years do you plan to be in the home?  Even saving money monthly makes little sense if a few years later you purchase something else.  Points, closing costs paid twice is hardly worth the savings usually within the first 5-7 years of refinancing.  So if your family is growing or other outside forces might force your hand, stand pat.
  • Has your credit score been impacted because of the financial crisis?  Since many lost jobs or received salary cuts, credit scores could have been negatively impacted since ’08.  If you think it might be a problem, go to www.freecreditscore.com  or www.freecreditreport.com for an assessment.  They will try to sell you add-ons and more detailed assessments, but it’s always best to be armed with your credit score before heading to your bank or mortgage broker.  It always helps to know what is impacting your credit and what you can challenge.

The current atmosphere is great for refinancing.  Rates might never be lower, but hopefully neither will your home value. If you plan to stay in your current home and have the money that might be necessary to meet your lowered LTV, you can substantially save moving forward and perhaps own your home quicker than you probably anticipated.

 

 

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.  All performance referenced is historical and is no guarantee of future results.

The professionals at HMC Partners do not provide Mortgage or Lending services.