It’s Not Too Late to Refinance
By: Mary McCraw, CFP®
With mortgage rates at historic lows, we have received many questions from clients about refinancing. To evaluate if refinancing makes sense, you need to know both the upfront costs involved in the loan and the rate for a new loan. You can then calculate how long it would take to recoup the upfront costs. Our rule of thumb used to be that you need a rate of 1% lower than the current loan to justify the costs of refinancing. However, there are local banks offering low-cost and even no-cost refinancing. Under these scenarios, it makes sense to refinance with a smaller rate spread. Of course, the rates on these loans are higher than the rate on a full-cost loan (for example, rates are about 0.25% higher on no-cost loans with a local lender). A no-cost loan could be a great option if you don’t have the cash to pay closing costs but want to take advantage of lower rates. If you have cash to put in, the full cost option would be worth considering. We can help you evaluate the savings in each scenario and determine the best course of action.
Another reason to refinance is to shorten the life of your mortgage. We strongly recommend having your mortgage paid off prior to retirement. If you are planning to retire in 17 years and have 25 years remaining on your mortgage, now would be an excellent time to refinance to a 15-year mortgage. If your timeframe is shorter, a 10-year mortgage is an option. We recommend a 30 year mortgage for younger clients who need the additional cash flow for other goals and have time to pay it off.
Due to low appraisals, some clients have had issues with sufficient equity when trying to refinance. While Little Rock was not hit as hard as other parts of the country, there are still areas that have had significant decline in home prices over the past few years. While 20% equity is required for the best rates and terms, there are options for refinancing with as little as 5%. If your current mortgage has an adjustable rate and you need to lock-in to a fixed rate, it may be worth looking into these options even with less than 20% equity. Of course, the closer you can get to 20% equity, the more options will be available. If you are in this situation, we can work with you to develop a plan to get to 20% equity or close within the next one to two years.
Lastly, we have had clients hesitant to refinance even when it makes financial sense simply due to the hassle factor. Normally, these clients have had a bad experience refinancing with one of the big banks, often through an online or phone process. In our experience using local lenders, refinancing can be a painless process. The lenders that have worked with our clients are available to meet face to face and work to minimize the hassle factor. As always, we encourage you to contact us if you have any questions regarding your specific situation.