We probably won't see the amount of home loan refinances that were in evidence in 1992-93, but if you look at the current home mortgage rates we are at the rates that sparked a boom in refinancing six years ago. If you own a home or have thought about buying a home you may have noticed that the market, the marketplace, real estate offices, the marquees over real estate offices, the economy and the national mood have changed in the ensuing five years.
Buyer and seller access to information, by way of the Internet and other telecommunication vehicles, have very much changed the face of the real estate industry and will continue to do so. It is a different time . . . a challenging time.
Real estate values have not soared, in fact they have dropped . . . in some areas precipitously. Yet with all the changes that have come about, certain concepts remain. If you plan to refinance now or in the future, I thought it may be useful to review some parameters that you should consider.
In 1992-93 it was very easy to refinance your property. Any property purchased before 1988 had substantial appreciation. We, as lenders and/or mortgage brokers, very seldom ran comparables to verify value. All we needed to know was the date of purchase and the current mortgage rate.
There was a "rule of thumb" when it came to the question of refinancing a property. Traditionally, it was thought that a 2% difference in rate was the appropriate number for one to make the decision to refinance his/her property. However, during the mega-refinance boom in 1992, with property values high and interest rates dropping monthly, the mortgage industry saw people refinancing properties when rates dropped by ¬ of 1 percent. Within a twelve month period (92-93) some homeowners refinanced four and five times to take advantage of the downward spiral of interest rates. "Why?" you ask. Good question! It wasn't that the individual homeowner decided that he should try to save $25.00 per month on a $150,000 loan.
It was the originator of the loan deciding it was easier to churn his/her existing client base than to go out and generate new clientele. Lenders, too, contributed to the practice. For many homeowners four or five new loans in a year did not unsettle them, since their payments kept going down.
Rather than using an arbitrary rule of thumb for financial decisions, there are some practical questions you should ask yourself if you are planning to refinance your home or investment property. First, "how long am I going to keep the property?" Another question to ask is, "what is the current rate?", but not only what is the rate but "what are my costs to refinance?" "Am I planning to refi to take money out of the property for improvements?" "Am I pulling equity out to pay off non deductible credit card balances, auto loans or other installment obligations?" "Are the rates tending to go down?" "Have they hit bottom?" This may be the most difficult question to answer.
The markets show no mercy when it comes to one's personal finances. Often we must make an educated guess. The answers to many of these questions are personal, but as to the answer to the first question . . . "how long?" By way of example let's say that the costs of refinancing your home is $3,000. The monthly savings after the refinance will be $100.00. By dividing your monthly savings ($100) into your total costs ($3,000) you have now determined that it will take you 30 months to break even. If you plan to be in the home 30 months or less, you may not want to refinance.
If you do refinance, every month after the first 30 months will now accrue for you a savings of a $100 per month. Home loan refinancing is an individual decision. By putting the numbers on paper with your financial goals in mind, you will determine what is the right course to take at the moment. Ask your lender the following questions. What is the rate? What is the program? What are the costs? And finally, you must determine the length of time you will be in your home and the purpose for the refinance.
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