Un­ex­pected gift

Baltimore Sun Sunday - - REAL ESTATE - By Natalie Camp­isi

With the av­er­age in­ter­est for 30-year fixed-rate mortgages be­low 4% again, millions more home­own­ers can save money by re­fi­nanc­ing their loans.

The re­cent drop in rates means that 6.8 mil­lion peo­ple can po­ten­tially save money by re­fi­nanc­ing their ex­ist­ing home loans and se­cur­ing a lower rate, ac­cord­ing to a new re­port by Black Knight. The lat­est data is from Septem­ber, when rates spiked above 4%. They have since tracked down again, which means even more peo­ple are el­i­gi­ble to save with a re­fi­nance.

The sharp drop in rates in 2019 has come as a sur­prise, as most ex­perts were bet­ting that rates would be on the rise, says Mark Ham­rick, Bankrate’s se­nior eco­nomic an­a­lyst. For bor­row­ers, how­ever, this is an un­ex­pected gift.

“The fact that this swoon in rates has oc­curred as and when it has un­der­scores the fact that ac­cu­rately pre­dict­ing the fu­ture of rates is dif­fi­cult in­deed. So, in­stead of try­ing to out­smart the mar­ket, go with what you know for cer­tain, which is where rates are right now,” Ham­rick says. “Be­tween the pace of the news cy­cle and eco­nomic de­vel­op­ments, the en­vi­ron­ment can change with re­lease of a sin­gle pres­i­den­tial Tweet. In an un­cer­tain en­vi­ron­ment, seize upon cer­tainty where you can find it.”

Why your credit score, in­come and debt mat­ter

Be­fore you spend the time ap­ply­ing for a mort­gage re­fi­nance, be sure you check your bal­ance sheet and credit first. Ap­ply­ing for a re­fi­nance is sim­i­lar to get­ting a mort­gage in that lenders will con­sider your FICO score, debt-to-in­come ra­tio and em­ploy­ment history when eval­u­at­ing your ap­pli­ca­tion. Your in­ter­est rate is a re­flec­tion of your fi­nan­cial sit­u­a­tion and banks tend to re­ward low-risk cus­tomers with bet­ter rates.

Bor­row­ers want to aim for a credit score of over 740 and a loan-to-value ra­tio of 75% or un­der to nail down the best rates, says Melissa Cohn, ex­ec­u­tive vice pres­i­dent at Fam­ily First Fund­ing LLC in Toms River, New Jersey. The in­come needed for a loan is de­pen­dent on the bank’s qual­i­fi­ca­tions; for self­em­ployed bor­row­ers, ad­di­tional proof of in­come may be re­quired to meet loan pre­req­ui­sites.

Home­own­ers who have im­proved their credit score since get­ting their orig­i­nal mort­gage should see if re­fi­nanc­ing makes sense for them. For ev­ery 20-point in­crease in credit scores, the in­ter­est drops about 0.125%. So, if some­one had a 680 credit score and now has above a 760, this alone will im­prove their rate by about 0.5%, says Daniel M. Sh­lufman, mort­gage banker at Clas­sic Mort­gage LLC in May­wood, New Jersey.

For folks who are hop­ing to lock in a bet­ter rate but are not cur­rently fi­nan­cially ready to do so, cre­ate a fi­nan­cial game plan now for a bet­ter po­si­tion down the road. This in­cludes pay­ing down debt and sav­ing money for an emer­gency fund (so that credit cards are not the go-to in a pinch).

“Any­one who has owned a home for a mod­est pe­riod of time can at­test that un­ex­pected ex­penses are the rule, not the ex­cep­tion. In ad­di­tion, life brings its own sur­prises and added ex­penses,” Ham­rick says. “For young fam­i­lies, that might in­clude the birth of a child and re­lated added ex­penses. By boost­ing your own fi­nances, ef­fec­tively pay­ing your­self, you’ll also be boost­ing your cred­it­wor­thi­ness, which can only help one achieve fi­nan­cial goals over­all.”

Best sce­nar­ios for re­fi­nanc­ing

Falling rates might seem like a money wind­fall if you have a higher in­ter­est rate than what’s avail­able today, but make sure re­fi­nanc­ing bol­sters your bot­tom line. Ex­pen­sive lender fees can ac­tu­ally put you in the red if you de­cide to re­fi­nance and the sav­ings don’t out­weigh the ex­pense.

Gen­er­ally, you need a drop in the rates of 0.5% to 1% (de­pend­ing on the monthly sav­ings and the clos­ing costs) to jus­tify do­ing a re­fi­nance,

Sh­lufman notes. The rule of thumb is that the sav­ings should be enough to re­coup the clos­ing costs within about 18 months to make a re­fi­nance jus­ti­fi­able.

“If the clos­ing costs are $3,600, you would need a sav­ings of about $200 per month on the mort­gage pay­ment for a re­fi­nance to be worth­while,” Sh­lufman says. “The larger the loan, the more likely a re­fi­nance will make sense since most of the clos­ing costs are fixed (e.g., ap­praisal fee, record­ing fees, etc.) while the monthly sav­ings will be much greater.”

If you’re pay­ing PMI, pay at­ten­tion

Re­fi­nanc­ing also makes sense is if you have pri­vate mort­gage in­sur­ance, or PMI, and the house value has in­creased so that there is eq­uity of at least 20%. Re­fi­nanc­ing into a lower rate not only shaves off in­ter­est costs but also knocks out monthly PMI pay­ments, which are typ­i­cally 0.5% to 1% of the to­tal loan on a yearly ba­sis. For bor­row­ers with a $200,000 mort­gage and a PMI pay­ment of 1%, for in­stance, that’s a sav­ings of $2,000 per year or $167 per month.

FHA loan bor­row­ers are another group that can po­ten­tially ben­e­fit from re­fi­nanc­ing into a con­ven­tional loan. Since PMI is more ex­pen­sive on FHA loans, those qual­i­fied bor­row­ers might save a small mint by re­duc­ing or elim­i­nat­ing their FHA PMI and lock­ing in a lower rate, Sh­lufman says.

Those who want to re­duce their terms and go from a 30-year fixed-rate mort­gage to a 15-year loan, might be able to ax an ad­di­tional 0.5% from the top since since 15-year loans usu­ally have lower rates. That might also mean larger monthly pay­ments, but over­all less in­ter­est paid over the life of the loan. Ad­justable-rate mort­gage hold­ers can also profit from drop­ping rates; the tim­ing might be right to lock via a fixed-rate mort­gage as rates con­tinue to hover around the 4% mark.

Fi­nally, folks hop­ing to tap their eq­uity while re­duc­ing their in­ter­est rate can take ad­van­tage of cashout re­fi­nances. Th­ese are low-in­ter­est loans that al­low home­own­ers to bor­row against their eq­uity by re­plac­ing their ex­ist­ing mort­gage with a new loan for a higher amount and re­ceiv­ing the bal­ance in cash. Th­ese can be use­ful for peo­ple who want to make home im­prove­ments as the in­ter­est is tax-de­ductible.


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