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.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by The Arkansas Financial Group, Inc.-“AFG”), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from AFG. Please remember that if you are a AFG client, it remains your responsibility to advise AFG, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. AFG is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the AFG’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: AFG does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to AFG’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

 

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