Is It Time for Me to Refinance?

There are many different reasons that a homeowner would refinance. One may want to gain access to the equity in their home to make home improvements, payoff debts. Another reason is to gain a better rate and or shorter mortgage term.

Cash Out Refinance: A Cash Out Refinance is when a homeowner will take out a new mortgage on their home and the old mortgage will be satisfied (paid off). Overtime your home can generate quite a bit of equity. Every month you make a mortgage payment (on fully amortizing mortgage loans) you are gaining more equity in the house as you pay down the mortgages’ principle. The equity can be accessed by taking out a cash-out refinance.

There are numerous reasons that a homeowner may opt to do a cash-out refinance.

1. Access the equity in the home for home improvements:

Some homeowners will use the funds for additions, upgrades, installation of a pool, etc. The possibilities are endless. Often times these are not things you can easily finance and the rates on mortgages tend to be lower (due to the terms on the loan being up to 30 years) and the impact on your monthly debts may be much less than other alternatives (installment loans, HELOCs, etc.).

2. Pay down debts:

Homeowners’ may have accumulated debts over the years and use the funds to pay off higher interest accounts. As mentioned above mortgage rates tend to be a lot lower (current average around the 4% mark) than credit cards (often in the 20% bracket) and even installment loans. A monthly mortgage payment may not increase dramatically but has the potential to pay off lots of other higher monthly payment debts.

Example: a $20,000 credit card payment may be a monthly payment of $650 dollars a month. An additional $20,000 added to a mortgage balance on a conventional loan with a 4.25% rate would be monthly difference of ~$100. You could eliminate a $650 monthly payment and trade it off an additional $100 in your mortgage payment.

3. Acquisitions of new Assets:

It is appealing to people to use the equity in their home to purchase new items. Examples of new assets may be land, other properties, cars, boats, etc.

Rate and Term Refinance: A Rate and Term Refinance is the refinancing of one’s current mortgage for the purpose of changing the rate and or term of the mortgage without taking any money from the new loan. Typically, the purpose of the rate and term refinance is to reduce the length of the mortgage (term) and change from a 30-year mortgage to say a 15 year mortgage or reduce the interest rate. There are a number of reasons that one would want to do a rate and term refinance their mortgage loan.

1. Interest Rates have Dropped:

Rates are always changing rates and fluctuate from day to day so over the course of a year or even a decade mortgage rates can change significantly. For a lot of the 1980s mortgage rates were well above 10% for a standard conventional loan. In the last year the national average has fluctuated almost a point (1%). When rates are low (as they have been most of the summer of 2019) borrowers will opt to refinance to access the lower rates.

2. The Value of the Property has Increased

In some scenarios homeowners will want to refinance to change the loan program and get rid of mortgage insurance premiums. Often borrowers with less than 20% down payment at closing will have monthly mortgage insurance premiums. Depending on the loan program these monthly mortgage insurance premiums may stay on the mortgage for the life of the loan (as is the case with FHA) other loan programs may have them for two or more years (conventional loans until 78% loan to value is achieved. When a refinance is done if the loan has 80% loan to value or less the monthly mortgage insurance premium will go away.

3. Would like to Pay off the Mortgage sooner (10, 15, 20 years):

For some homeowners they may want to shorten the term of their mortgage. A 15-year mortgage will offer a 180 month term, they payment may be higher but ultimately the mortgage is paid off in half the time and the interest payments made over the life of the loan will be substantially lower.

Often homeowners can benefit from a combination of 1-3 above when refinancing. It possible that rates have dropped AND property values have gone up. In this case the homeowner would benefit from lower rates AND no monthly mortgage insurance premiums. Some homeowners may opt for a shorter term and a lower interest rate.

When deciding if a refinance is for you another factor you need to consider is the costs to secure the new mortgage. Closing costs for refinance loans can very drastically depending on numerous factors. Here is a quick list of closing costs you would expect to see and how they may vary for each transaction.

1. Settlement Costs:

Settlement costs will include a closing fee for title to complete the title work for you, a title search, and sometimes other fees like a notary fee, courier fee, etc. These will vary depending on the title company that is doing your title work.

2. Lender’s Title Insurance:

Lender’s title insurance is required anytime you get a mortgage loan. If you have a prior insurance policy (owner or lender) you can save big on the new policy. All properties with a standing mortgage loan will have a lender’s title policy. Foreclosures that are bought at auction or in a tax sale will likely not have such policy. Supplying your prior policy can save you around $500 dollars on your lender’s title insurance and endorsements. The savings will depend on the new policy amount as well as the old policy amount. Often you can reach out to the title company who did your last closing to obtain this policy information if you are unable to find it on your own.

3. Survey:

A survey is required for all mortgages as it is required to issue title insurance. Again, if you have a pre-existing survey you can usually use this for the new mortgage loan. Sometimes surveys may be too old OR the owner may have made changes to the property which would require and updated survey.

4. Recording Charges and Transfer Taxes:

Recording charges and transfer taxes are determined off the loan amount. The state has preset tables that determine these fees.

5. Escrows and Prepaids:

Escrows are funds taken in order to pay taxes and insurance when they become due. THIS ONE CAN VARY DRASTICALLY depending on when you refinance and when your taxes and insurance are due.

Example: In the state of Florida taxes are collected in November (this is when the tax bill is received and mortgage servicers will remit payment to the county, it is worth mentioning that discounts are given when payments are made in November).

If Homeowner 1 refinances in January they will likely take 6 months of monthly tax payments for the escrow account > working from the November due date > November, December and January make for three months, they will take one for February (you won’t make a mortgage payment in February) and then two months of reserves >>> total of 6 months

If Homeowner 2 refinances in September they will likely take 14 months of monthly tax payments for the escrow account > working from the November due date > November – September 11 months, they will take one for October since you won’t make a payment, and then two months of reserves >>> total of 14 months

*** If takes are $400 a month you are looking at escrows of $2,400 for Homeowner 1, $5,600 for Homeowner 2. If the current mortgage has an escrow account you will receive a check for whatever is left in the mortgage’s escrow account when the loan is paid off. Usually you will receive these funds in 2-4 weeks after the closing.

The same goes for insurance you will have to escrow based on the date your insurance policy runs through. Not all lender’s require escrows be collected. Some will allow escrows to be waived when loan to value is 90% or less. In this case the homeowner is directly responsible for making the tax and insurance payment each year when it becomes due.

Certain loan programs will allow for you to raise the loan amount in order to cover the new escrow funds to be collected. In VAIRRL and FHA Streamlines you not able to finance any closing costs or prepaids.

Prepaids will include per diem interest and possible the insurance premium if the premium is due in the next 30-60 days.

So is it a good time for you to refinance? A lot of different factors will contribute to you determining if you are ready for a refinance. For some does the lower rate and therefore payment outweigh the closing costs? For others is there enough equity in their home to get the cash needed for the desired home improvements? There is no right or wrong answer it is what works best for you! If you need help figuring out if the time is now please contact us at Carbon Capital – 904-513-8000.