BUSINESS & FINANCE :: APRIL/MAY 2007
Understanding When & Why to Refinance
WHY REFINANCE?
Buying your home may have felt like a complex transaction. There was a lot of paperwork, a lot of anxiety, an avalanche of details involved in packing, moving, closing, unpacking. When you think about refinancing, you might remember those headaches and not want to re-live them. But there are a lot of reasons to give it careful thought. Not only is loan processing much quicker and easier these days, but refinancing may serve a lot of other very individual purposes as well. If you’re wondering whether it’s worth your while to refinance your mortgages, consider the following:
Refinancing may put money back in your pocket every month
If rates are lower now than when you originally financed your home, or if you choose an adjustable rate mortgage with a lower initial interest rate than what you’re currently paying, your monthly payment will go down (assuming you don't shorten the term or increase the loan balance significantly). If you’re still paying for Private Mortgage Insurance, refinancing may allow you an opportunity to restructure the terms of your loan and either reduce or eliminate PMI payments altogether. This will also result in a lower monthly payment.
Recasting to a more favorable rate, or eliminating monthly PMI means you can save more every month or finally afford that health club membership, dinners out, or new outfit you've had your eye on. Not only that, but you probably won't have to scrape together money to bring to the closing table, because you can usually include all of the costs to close your loan in the new loan amount.
Did you know that Congress recently passed a bill which makes PMI tax deductible for homebuyers who either purchase or refinance their home in 2007? Homeowners with an annual household income of $100,000.00 or less can deduct up to 100% of their monthly PMI payments. For each additional $1,000.00 of income, the deductibility is reduced by 10%. A household with an annual income of $110,000.00 or more loses this tax break.
Refinancing may put a lot of money in your hands today
If you have significant equity in your house, you could apply for a cash-out refinance and walk away from the closing table not only with a new loan but with a large amount of money to invest or to use for a once in a lifetime opportunity - like the purchase of a new car, a boat, an extensive vacation, college, home improvements or anything else you've been dreaming of all your life. You’ve worked very hard for your home, there’s nothing wrong with letting your home work for you for a change.
Refinancing may give you a good night's sleep
If you have an adjustable rate mortgage and the worry over the direction of
interest rates has been keeping you up at night, you could refinance into a
fixed rate and stop all of that tossing and turning. The Option ARM, or Pick-A-Payment
ARM, which was a very popular product suggestion by many mortgage salespeople
over the last few years has left a lot of borrowers in a very precarious, vulnerable
position. When you hear about the recent increase in mortgage default rates,
you can bet that the Option ARM will be referenced as one of those “risky
loan programs”.
When used properly (and sparingly), the Option ARM mortgage is meant to provide
a short-term cash-flow solution at a time when home prices and property values
are increasing. Interest rates and payments based on a 1.25% starting rate sound
very enticing, but that rate is usually only in effect for up to 3 months before
the much higher rates kick in and continually change on a monthly basis.
Borrowers are usually sold on the idea of having four payment options ranging
from the equivalent of an amortized 30 year or 15 year fixed rate payment to
a minimum monthly payment that is lower than the actual interest that has accrued
for the month. While the lower payment option may sound attractive, the harsh
reality is that if you’re paying less than the interest accrued for the
month you’re actually increasing the balance of your loan by the difference
in payments. Not only does this make future payments higher, but it reduces
the equity stake you have in your property. The liens placed for these loans
are for 110% of the value of the property, foreshadowing the serious potential
for negative amortization. Thousands upon thousands of these loans were generated
over the last few years, many without a thorough explanation of how the product
really works and the risks of its misuse.
Getting out of a bad loan program, or even getting away from a Mortgage Servicing Company with inadequate or inaccessible customer service is a valid reason to consider refinancing. A stressful financial situation can seriously detract from your satisfaction as a homeowner. Refinancing with a reputable lender may make your situation a lot more tolerable and, ultimately, more affordable.
Refinancing may help you get organized
Let’s face it. Life just keeps getting more expensive by the moment. One of the inherent benefits to homeownership is that the equity in your home may be used to your financial advantage when you need it the most. Maybe what you really need is to get control over all of the different charge cards and personal debt that have sprung up around you. You could refinance your home, use some of the proceeds to consolidate your debt and just make one convenient, low-interest payment every month. As an added benefit, the interest you pay on your newly consolidated debts may be tax deductible too!* (*always consult with a tax advisor to be certain)
Refinancing may get you out of debt faster
Refinancing your current loan to a fifteen year or a bi-weekly loan may be possible without even raising the payment significantly, particularly if rates were high when you first bought your home. You could save thousands in interest and own your home many years before you would with a standard 30 year loan.
Do you find it hard to squirrel money away in a savings account on a regular basis? The average American does. Well, consider that a reduced term mortgage promotes forced savings. The interest that you pay over the life of your loan is reduced significantly because the principle owed on your loan is repaid at an accelerated rate. That extra money each month increases the equity you have in your home. Planning to “buy-up” to a more expensive home in 5 to 10 years? Why not ensure that you can make a larger down-payment on your new purchase by building your equity stake in your current investment.
Refinancing to reduce the term of a loan is often an important consideration when planning for your retirement. Will you be able to afford to maintain your lifestyle and your same mortgage payment with a fixed income? Sometimes, the key to a successful transition is to moderate your housing expenses, starting with your mortgage payment. One possible solution is to reduce the length of your mortgage so that it is completely repaid by retirement, or shortly thereafter. Another option may be to recast your mortgage balance for the longest term possible, to reduce your monthly housing expense. Both are valid reasons for considering a refinance.
So, why refi?
The answers are as diverse, and full of personal preferences, as the types of housing we choose to call home. Refinancing a mortgage is a strategic financial decision. The process itself is much less complicated than the purchase of your home, in part because there are many fewer people involved in the process and you already live in the property.
If you are considering whether to refinance your existing mortgage(s) at the current time, or sometime in the foreseeable future, please consult with your Accountant and/or an experienced Mortgage Loan Originator. They can provide you with additional insight, advice, and help you develop a customized strategy that’s right for you.
With over 13 years of residential lending experience, Rob Scheinberg has helped thousands of people achieve their goal of homeownership. Whether you are a first time home buyer, refinancing an existing loan, remodeling, or building your dream home, Rob has a solid understanding of the area real estate market and what it takes to close your loan with efficiency and expertise. For more information, contact him at 302-453-2350, ext. 227 or Toll Free 877-915-9159, ext. 227.
SunTrust Mortgage, Inc. is a wholly-owned subsidiary of SunTrust Bank - a $181.1 billion financial institution operating in Virginia, the District of Columbia, Maryland, North Carolina, South Carolina, Georgia, Alabama, Tennessee and Florida. Currently, SunTrust Mortgage, Inc. originates loans through 214 locations in SunTrust markets and adjacent states, maintains correspondent and broker relationships in 49 states and services loans in 50 states and the District of Columbia.
In 2005, SunTrust Mortgage received the prestigious JD Power Award, ranking them #1 for “Highest in Customer Satisfaction among Mortgage Servicing Companies”. In 2006, SunTrust Mortgage received the JD Power Award and their #1 ranking for “Highest in Customer Satisfaction with Primary Mortgage Sales”.
