THE CREDIT CORNER

REFINANCE 101
By
Chris Seymour, President
Country Mortgage, Sedona

As the economy weakens and interest rates decline, lower mortgage rates can offer the opportunity for savings by restructuring the financing on your home. Certain benefits need to be produced to determine the overall economics. The factors that should be weighed in any refinance are the new interest rate and payment, the cost of the transaction and the number future payments that will produce the savings to pay back the closing costs. As we look at these factors together, the first issue to be addressed is how long am I going to own this property or how long is the loan balance going to be outstanding? The longer the outstanding loan balance, the greater the accumulated payment savings. Therefore if you plan being in the home through your golden years and you don’t anticipate winning the lottery, the lowest rate possible should be chosen that offers the maximum reduction in monthly payment even though the costs may be higher than you anticipated. Simply divide the closing costs by the monthly savings amount to compute exactly when you actually start to profit. A reasonable cost pay back period should be no longer than 36 months. Closing costs are usually financed into the balance of the new loan so the costs are fortunately not paid out of pocket. The alternative situation would be the short term scenario where you will be selling the house in a few years or from inheritance will prepay the loan down to a lower balance. Since there are fewer months from which to save, you would reduce the closing costs as much as possible by accepting a slightly higher interest rate. Though the monthly payment saving will be smaller, so will the costs. Do the math again to determine a shorter cost recapture period to start saving money. Program selection can also be critical to enhancing refinance benefits and meeting goals. Longer term property “horizon” scenarios including investment properties should target 15 – 30 yr fixed rate programs. Short term holding strategies might chose interest only programs that provide immediate lower monthly payments if prepayments are anticipated or intermediate term ARMs where the rate is fixed for a one to five year period. ARMs offer lower initial starting rates in most normal markets. We are not in a normal market however, so ARMs today offer very little value.

Cash flow savings in today’s market is key. Conserving equity through a low cost refinance strategy may be undermined by declining equity in today’s market conditions. So, go for the gusto with the best rates in years as we hold on for better days.

Please feel free to email me questions about anything associated with real estate finance. I’ll reply to you personally and answer the most common questions every other month in future columns. My email is chriscountrymtg@aol.com