That was a question that was recently asked by one of my previous clients. In this instance they were not sure at first what their options were by refinancing. They thought they had a very good rate (which of course it was) and there was not a need to do anything. The obvious reason people refinance is to save money. They want to lower their interest rate. That said, people do refinance for other reasons, including:
Changing mortgage types (from an adjustable rate to fixed rate, for example)
Changing the mortgage term (from a 30-year to a 15-year, for example)
College Education (investing in yourself or your child’s future)
Consolidating debt (creating immediate cash flow for savings)
Home Renovation (increasing the value of the home)
Tapping home equity (while avoiding a second mortgage)
The old rule-of-thumb was to refinance when mortgage rates had dropped 2% below your current loan. But waiting around for mortgage rates to drop two percent can wind up costing you time and money in the long run.
For some homeowners, refinancing to a new interest rate as little as half a percentage point less than your current rate could be enough for substantial savings. “But wait, the value of my home has dropped in value so much, that I owe more than what my property is worth.” That was a quote that was mentioned from another client. Since the mortgage meltdown, the government has provided a few programs that allow a person to refinance without an appraisal.
How can you tell if refinancing makes sense for your situation? Lets take a look at the case study below:
As we see here a client was thinking about refinancing and had really good rate of 4.625% for 15 years, but also had a home equity line of credit that was at prime for 30 years. They were halfway through their first mortage and had only 8 years left to pay it off. But the home equity line of credit would remain and they would be paying on it for many years thereafter. Their goal was to retire in about 12 years, however the home equity line of credit wasn’t quite fitting into their plans.
After a careful analysis of their finances and looking at their short and long-term goals, I created a plan that would enable them to keep their existing payment strategy and still be on track to pay off their home loan in 12 years. With a new 15 year mortgage the savings they created of $237 a month by adding the savings and paying towards their principal they would achieve the following result below:
They were ecstatic at the outcome, however they were a little concerned about being disciplined enough to pay the savings down every month.
Here is what I recommended to them. First, open a separate bank account that would just pay the mortgage only. Also, have the additional $237 be taken out of their personal checking or savings account and have it be directly deposited into the account where the mortgage is being paid from.
Instruct the mortgage company to take out the mortgage payment plus the $237 a month to go towards the principal. This way they will continue to go on as normal and not even think about it. If you or someone you know may need a quick analysis of their existing mortgage, don’t hesitate to contact me.
As your Mortgage Advisor, I want to continue to help you:
Make truly informed decisions.
Reduce the hundreds of thousands of dollars you could waste over a lifetime on the wrong debt or poorly structured debt.
Make better decisions that can bring on retirement sooner and more securely.
Improve your tax benefits.
Make your financial dreams a reality.
If you have found this information useful please pass this along to a friend or someone you care about.
Until next time…
Geoffrey Bolen
Your Mortgage Advisor For Life
Primary Residential Mortgage, Inc.
Phone: 301-588-4701 x84 | Fax: 301-588-4709
Email: gbolen@primeres.com
P.S. It’s my intentions to continue building lifelong relationships one client at a time and remain your personal mortgage advisor for life. If you know of a friend, family member, or coworker who is looking for financial options, either through purchasing or refinancing a home. Be sure to send me an e-mail, I know someone. Your referrals are the greatest compliment I can receive.