We know the saying, "The Time is Ripe." It is the moment to do something or for Bsomething to happen. We cannot watch a fruit or vegetable plant ripen without thinking that there is an opportune moment for almost everything. So it is with our lives. A decision must be made to do something or at times more importantly a decision to do nothing must be made. If you are still deciding or mulling over whether to refinance or not or to purchase or not . . . "The Time is Ripe" to do something or nothing. Nevertheless, before you do something get the facts.
Most people know interest rates have come down. From conversations with my clients, I can tell you that many people, however, have not taken any action with this piece of information. The action to take is not necessarily to run out and refinance your mortgage. It is to make a determination whether it is in your best interest to refinance your mortgage. To make this decision a few questions must be asked. To better ask the questions, you must have understandable information that will make the analysis easier.
Refinancing your home mortgage costs you money! For many, refinancing in today's real estate market, this money can only be recouped by time. The longer one stays in the home after the refinancing of the loan (for a lower rate) the lower the cost of the new loan. If you plan to move in a short time, the refinancing of your home loan will cost you money. It can cost dollars up front and/or create a loss of equity when you sell, if you financed the closing costs inside the new loan.
Your home loan probably is either a fixed or an adjustable or a combination of both. What follows also applies to anyone thinking about purchasing a home. As most of us know, there is the traditional fixed rate loan set for 15, 20 or 30 years. Since the early 1980s, we have come to accept adjustable rate or variable rate loans as part of the mortgage portfolio. This adjustable program gives the lender a clear leverage advantage, since as the name suggests, it adjusts to market conditions. In a period of declining rates, the first action to take is: READ YOUR CURRENT NOTE.
As time goes by, we forget what program we signed up for when we bought our home or how the program works when a set period expires. If credit problems existed or you could not adequately verify your income when you purchased, you may have taken out a two, three or five year fixed rate loan that converts to an adjustable rate loan after the fixed period expires. This, however, is not an ordinary adjustable. This adjustable can have a margin of 4, 5, 6 percent or more over an index. If you let this loan adjust, your new rate may create payment shock. The margin is not the interest rate . . . the margin is added to an index rate to which your loan is tied. Now is the time to review that loan and decide if it is feasible for you to refinance. Even if circumstances exist that do not allow you to qualify for the low rates currently available, you can possibly reduce the rate you have or get a lower limited year fixed rate.
Most adjustable rate loans are tied to certain indices. The most familiar indices are the Eleventh District Cost of Funds (COFI), LIBOR (LONDON INTERBANK OFFERED RATE), U.S. T-BILL, or the PRIME RATE. Today's rates for these indices can range from 4.8% for COFI to 7.75% for the PRIME RATE. Each program tied to one of these indices will have a different margin, monthly payment adjustment, annual and/or lifetime interest rate or payment cap. By reading your note, you will understand your program, its adjustments and what to anticipate as your next payment. Your lender can give you the index rate for your next adjustment and with that information you can determine whether "the time is ripe" for you.
Get the total costs for the refinance transaction, including points, appraisal, credit report, title, escrow, old lender charges and any other miscellaneous charges. Take that figure and divide it by your monthly savings with the new loan. This is how long, in months, it will take to recoup the costs for your refinanced loan. A little secret that you can use as a guide is; for every .50 of a point in discount fees (one point is 1 percent of the loan), you can reduce your interest by .125 of 1 percent. By paying points, you reduce the interest rate. Conversely you can fold part or all of the costs for your newly refinanced loan into the rate.
By structuring your new loan in this fashion, you have little or no out of pocket costs. Even with a higher rate than the lowest rate quoted today, you can reduce your payment. If the new rate is .50% lower than your current rate, you will see a dollar reduction. For example, a rate reduction of .50% on a $150,000 loan will reduce your monthly payment by more than $50.00. By incorporating your costs into the interest rate of your new loan, you have not increased your mortgage obligation nor reduced your equity position. This may be the time to work the numbers and see if "the time is ripe."
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