You see a lot of advertising and hype about refinancing to a lower interest rate.  But should you?  When I sit down with homeowners the first thing I have to determine is why they want to refinance and what exactly is the benefit to them.  Lowering your interest rate should be looked at as a means to an end. You should first determine your goal(s). Examples include:

 
  • Do you need to lower your monthly payment to pay your monthly living expenses?
  • Do you want to pay less interest over the entire life of the loan?
  • Do you want to pay your loan off early so you can retire without a mortgage payment?
  • Do you want to take cash out of the property for improvements?
  • Do you want to take cash out for debt consolidation?

Each of these goals may call for structuring your new loan a bit differently than just lowering the rate.  You also need to consider how long you’ll keep your home before you’ll want to move again.  Not only that, the costs associated with the new loan may cancel out the savings.  

 You may find that your best financing option may involve something you hadn’t considered.  By keeping an open mind the best choices could possibly include things like mortgage insurance, paying closing costs out of pocket rather than financing them into your loan amount.  Too many times mortgage shoppers dismiss out of hand the very loan product that would save them the most money because it has one feature they don’t like.  Don’t bite your nose to spite your face!

 Success Stories….

   A financial planner I did a loan for referred one of his clients to me.  The client was saavy with his money and was dutifully paying a few hundred dollars extra every month towards his mortgage balance.  He wanted to pay it off faster and reduce the interest he paid over the life of the loan.  He was doing a pretty good job, but when he called me he said he also wanted to lower his interest rate.  I was able to examine situtation and recommend structuring his new loan in a way he hadn’t considered.  By going with my plan he was able to save an additional $103,000! 

   A couple was referred to me who were desperate to lower their mortgage payments.  Since they had bought their home the property taxes had gone up substantially.  They also had 3 children, two more than when they bought the home.  Debts had mounted and they just wanted to get some relief from the bills.  They also wanted to add a family room in the basement for their kids to play during our cold New Hampshire winters.  But they said it was only a pipe dream, they knew they couldn’t afford it.  When looking at their debts I realized some of their debts could be consolidated into the new loan.  Because they had plenty of equity in their home we were able to take some cash out to build the family room as well.  By refinancing they lowered the total amount of debt they had to pay every month.  Not only did they get their family room they now had extra money every month for emergencies or pay off their remaining debt.  They were very happy customers!

 Types of refinance loans….

      Rehabilitation Loans (Rehab) – When a home needs repairs, updates, and cosmetic improvements this might be the best choice.  These types of loans are best suited for homeowners who plan to hire a contractor to do the work for them.
 
     Rate/Term - Used in the industry to describe a loan that shows the borrower is refinancing their current loan for the purpose of either reducing their interest rate or shortening the term of the loan.
 
     Cash Out - Simply put, it means you are taking cash out of the property beyond what is needed to cover any associated closing costs.  This is a good choice for the handyman who wants to make improvements to the home and do the work himself! 
 
     Streamline - These loans are even simpler than the rate/term. If, when you refinance, you are staying with the same kind of loan program, from FHA to FHA for example, your loan may be streamlined.  You might not even be required to have an appraisal.  Good news if your home value is fallen.