Is it Time to Refinance Your Home?

Mortgage interest rates have been very attractive lately and the Fed has recently made dramatic cuts to the Funds Rate. This may be particularly important for both potential new home buyers and existing home owners, as thoughts of refinancing comes to mind. I, along with many of you homeowners out there, are wondering: Is this a good time to consider refinancing my home loan to save some money off the top?

Well, I decided to ask Rhonda Porter, of The Mortgage Porter this question, and here’s what Rhonda, a Certified Mortgage Planning Specialist in the business for over 20 years had to say:

Katrina:  So, Rhonda, with the recent drops in interest rates, I’m wondering if you think this is a good time to consider refinancing your home?

Rhonda:  This may be a good time for people to refinance as long as they break even on the closing costs during the time they are retaining the home. When the Fed lowers the Fed Funds rates, oftentimes mortgage rates may go up. Mortgage rates are based on mortgage backed securities (bonds) so when the stock market is not performing well, typically traders will pull money from the stock market and seek the safety of bonds and this is what moves mortgage interest rates lower. Prime rate is impacted when the Fed cuts the Funds Rate and since home equity lines of credit are based on the prime rate, those home owners with HELOCs benefit with the Funds rate is reduced and when the rate is increased, so goes their HELOC rate.   Now may be an especially good time if you’re considering refinancing because when the Fed cuts rates, it’s causes fear of inflation, which is a bonds worse enemy (this causes mortgage interest rates to rise).

Katrina: Are there any specific types of homeowners in particular who should be considering the refinancing of their home?

Rhonda:  Katrina, beyond those who can save money by reducing their mortgage payment, home owners who have adjustable rate mortgages where the fixed period has less than two years remaining should contact their mortgage professional to see if they should refinance.  At the very least, they should ask their mortgage professional to review their ARM with them so they understand worse case scenario what their new payment may be and how the adjustable rate mortgage actually works. Home owners who are changing their vesting (divorce, dissolving partnerships, etc.) may also want to consider refinancing if one party is keeping the home in order to remove the liability from the person who is moving out (unfortunately quit claim deeds and divorce decrees do not achieve this).

Katrina: How much lower should the interest rate on a new loan be than the interest rate on your existing loan to make refinancing worthwhile?

Rhonda:   Some people feel that a 1% reduction in rate is what’s required to justify a refinance when they should actually be considering how long it will take for them to break even.  If someone is paying extra cost for the lower rate (with points), it might make more sense to opt for zero point or reduced closing costs loan with a slightly higher rate.   Consumers should figure out how long it will take for them to break even on the refinance by adding the closing costs (this is not including your taxes, insurance and prorated interest) and dividing the difference between their current mortgage payment and the proposed mortgage payment. If they’re going to break even a couple of years and they plan on staying in the home beyond that time span, the refi is worth consideration.  However, other factors such as switching from an ARM to the security of a fixed rate mortgage may outweigh factoring in a specific rate reduction depending on the home owners plans.

Katrina: Are there any special considerations for jumbo loan holders? Would it make sense for these people to refinance right now?

Rhonda:  Katrina, this is an excellent question.   Any day now, we should to have a lot more information regarding the conforming loan limits being raised.  So far, the House has passed Bill HR 5140 and we’re still waiting on the Senate to vote on the “stimulus package” which may take place this week.   The White House has set a target date of February 15, 2008 for the final passage of this bill.  

The conforming loan amount may be based on 125% of the median home price by geographical area.  A small problem is that HUD still needs to determine and publish the “median home prices” for specific areas.   Again…we still need to wait and see what the Senate does with this Bill.

I understand that FHA will be increased to as much as $729,750 in high cost areas.  Can you imagine that FHA will be our “new jumbo”!

Katrina: Yikes!

Rhonda: Someone with a loan amount over $417,000 may want to consider meeting with their mortgage professional and preparing to refi (if it makes sense with their rate and financial goals).   I’m speculating that when and if this bill passes, there will be an “add to rate” for loan amounts over $417,000.   I do believe the “add to rate” will still be more favorable than what the current rate is.   Perhaps we’ll see a 0.25% higher rate for those loans over $417,000 to compensate Fannie and Freddie for the additional exposure.

Katrina: What is a zero-cost loan? Is there really such a thing?

Rhonda:  There is!  However, nothing is free.  When someone obtains a “zero cost loan” the rate is slightly increased to pay for the actual cost of the loan.   This is similar to when someone has a loan priced with “no points”.   Typically a point (which is 1 percent of the loan amount) equals 0.25% to rate.   So if someone opts to have a mortgage priced with zero origination/discount points, their rate may be around 0.25% higher than if someone opted to pay a point.  The rate can be increased slightly higher which then pays for the closing costs of the refinance.  

A no cost refinance especially makes sense if someone is not planning on retaining the mortgage for a long period of time and they’re still saving money with their mortgage payment.  Breaking even is not a factor since there is “no cost”.    Consumers can have their mortgage priced how ever they want and should compare various scenarios to see what makes sense for their personal financial situation and goals.

Katrina: Rhonda, thanks so much for taking the time to answer these questions! You’ve given me and a ton of other homeowners out there something to think about…More info can be found on Rhonda’s website, The Mortgage Porter.