It might be time again to consider a refinance
Low interest rates are sparking another mortgage-refinance boom. If you haven’t applied for a loan in a few years, it might be time to reconsider.
One reason to refinance involves swapping your current loan for one with a lower interest rate, thus lowering your monthly payment. Another reason is to “cash out,” by borrowing more than what you currently owe, so that you can use the additional proceeds for other purposes. Or perhaps you just want to switch your adjustable-rate mortgage for a fixed-rate loan, with the extra predictability that comes with it.
“If you were told two or three years ago that you couldn’t qualify, check again,” said Jay Farner, CEO of Quicken Loans, during a recent stop in Phoenix. “A lot more people can qualify now because of higher employment and rising property values.”
Quicken Loans has 1,200 employees in the Phoenix area and continues to hire for a range of positions.
In general, debt is best avoided, although it really depends on how you intend to use the money, how much you pay and how good you are at managing payments. With rates so low, refinancing becomes more appealing.
Saving money by refinancing a loan might equal “the pay raise you didn’t get,” said Greg Mcbride, chief financial analyst at mortgage-tracker Bankrate.com.
Old rules might not apply
You might have heard that refinancing makes sense only if you can get a new mortgage with an interest rate at least a percentage point or two below your current loan. But the analysis really depends on factors such as how much you could pare your monthly payments, how much you would pay in closing expenses, how long you plan to remain in the home and whether you could get a better type of loan.
In Farner’s view, there’s no magic interest-rate differential after which refinancing makes sense. Mcbride said a new loan could prove valuable even if you cut your rate by a fraction of a percentage point.
“For most people, if you can shave one-half or three-quarters of a point off your mortgage rate, you need to look at refinancing,” he said.
Part of the analysis involves calculating your break-even period – the time it takes you to recoup the appraisal, application and title-insurance fees and the other expenses involved.
For example, your break-even period would be 30 months if you face $3,000 in refinance costs and anticipate saving $100 a month. If you don’t plan to stay in the home at least that
long, it’s probably best to stick with your current loan.
Mcbride considers refinancing especially sound if you could recoup the necessary costs within two years.
Just be aware that the break-even formula doesn’t track your total savings, or lack thereof. You could wind up spending more in overall interest costs if you refinance back to a 30-year loan after making many years of payments on your original loan.
Fixed-rate mortgages hard to beat
In past years, when interest rates were much higher, many people opted for adjustable-rate mortgages because they couldn’t afford 30-year fixed loans, with notably higher rates. But overall interest rates have compressed so much now that there’s scant difference between the two.
For example, one type of hybrid mortgage, featuring a fixed rate for the first five years then adjustable rates after that, now sports higher rates than straight 30-year fixed loans — with rates around 4.1% and 3.8%, respectively, according to Bankrate.com.
This reflects the current flattening of the yield curve, which means rates on short-term bonds are temporarily about the same as those on long-term bonds — an unusual situation. Mortgage rates are pegged to rates on various U.S. Treasury bonds.
“There’s little incentive to take the risk of a future rate (increase) by going with an adjustable loan,” Mcbride said.
For people who want to pay down their principal more quickly, 15-year fixed mortgages are another option. The flip side with these is that you’re facing higher monthly payments compared with 30-year loans because you’re paying down the debt faster.
Tax deductions might not help
One of the traditional selling points to buying a home or refinancing a mortgage involved tax savings. Many homeowners still can deduct the interest they pay, but tax reform enacted two years ago will make it harder for some borrowers to qualify for a break.
On new loans, interest may be deducted on up to $750,000 in mortgage debt, down from $1 million before. Still, that means most buyers or people who refinance could be eligible for a tax break, assuming they itemize rather than take the new, higher, standard deduction.
As another result of tax reform, interest on home-equity loans can be deducted if the proceeds are used to buy, build or make improvements on properties, such as adding a room or remodeling a kitchen.
Interest no longer is deductible if proceeds are used for unrelated purposes such as paying down credit-card balances.
For example, said Mcbride, if a borrower owes $200,000 on a mortgage and cashes out another $100,000, only those interest payments attributable to the original $200,000 would be deductible.
If you’re thinking of taking cash out on a new mortgage to pay down other debt, one reason for pause is that you could be converting an unsecured debt (such as on credit cards) to a debt tied to your home. You could risk a foreclosure if you miss payments.
It pays to prepare
The cleaner your credit reports, the higher your credit scores will be, and that will allow you to get the best interest rates. Hence the importance of checking your reports for errors and getting them corrected, which could take weeks.
If you haven’t shopped for a mortgage in a while, you might find that the hassles are fewer and the time commitment less than you expected. So much can be done electronically that the process can move faster today.
“People often think it’s too challenging” to pursue a new loan, Farner said. “But it often doesn’t take that much time.”
From applying to closing on a loan, borrowers often can get it done within 30 or possibly 15 days, he said. Factors that slow the process include appraisals, questions about the title on a property and borrowers’ inability to get their information ready.
Mcbride said, “Make sure you have bank statements, pay stubs, tax returns and other documents easily accessible.”