People generally refinance when mortgage interest rates drop significantly, but borrowers with recently improved credit scores (from paying off credit card debt, making mortgage payments on time, etc.) are often candidates for better interest rates as well. If you haven’t checked your credit score in a while, it’s a good time to call a mortgage consultant. You are entitled to receive a free credit report annually from each of the three major credit bureaus. (Visit AnnualCreditReport.com.)
The question most asked is, “Why should I go back into a 30-year loan?”
There are two schools of thought on this subject, and your mortgage consultant should work hand-in-hand with your financial planner, if you have one, to determine what works best for you.
One option is to take the route of the “same payment” refinance, and actually pay off the loan faster and save money on interest fees in the long-run. If refinancing results in a lower monthly payment, the borrower can still continue making the same payment they made in the original loan, and the extra money will be applied to the principal balance.
For example: Let’s say you have 25 years remaining in your current loan, and you refinance back to a 30-year loan with a slightly lower interest rate, resulting in a payment reduction of $200 per month. You could then take that extra $200 per month and apply it toward the principal on the new loan. At this rate, the loan will be paid off in 22 years and 4 months, which is 2 years and 8 months less than the original loan. (Note: This is an example; actual amount could vary.)
On the other hand, if the borrower’s financial planner is a proponent of best-selling author and investment guru Douglas Andrew’s philosophies (see Missed Fortune), he or she may suggest investing the extra money in a side-fund that could earn a better rate of return and grow to the amount of the mortgage (and beyond) in even less time. This method provides excellent liquidity, but having more direct access to this money may be too tempting for some homeowners.
Regardless of the reason for the refinance, the mortgage consultant will need to know what the existing loan scenario entails, review the homeowner’s long-term goals, and provide a comprehensive spreadsheet that compares and contrasts the various loan programs available.
The downside? Refinancing to obtain a lower interest payment could also result in a lower deduction at tax time. Your mortgage consultant and financial planner should work hand-in-hand with your best interests in mind. n
Richard Pazornik is Sr. Mortgage Consultant affiliated with Embrace Home Loans. Visit www.RichardPazornik.com or call (443) 600-1282 for more information.