Tuning into loan refinancing to reap the benefits of today’s low rates
Historically low interest rates have many consumers considering refinancing on their business, home, school and car loans.
For example, according to Freddie Mac, the federal home loan mortgage corporation, as of its weekly survey data released Oct. 8, the average rate for a 30-year fixed-rate mortgage is 3.76 percent, and it goes down — hitting the lowest rate at 2.55 percent for a 1-year adjustable-rate mortgage.
Compare this rate to this time last year, when rates were hovering around 4.04 percent for a 30-year FRM, according to Mortgage News Daily.
Biz New Orleans connected with Mark Higdon, attorney at law with GC Lending Services, Inc., Richards Higdon Huguet & Campani Law Firm, and Team Title, LLC., to learn more about how to take advantage of the low rates, who should refinance and when, and to get tips on the best course of action should you decide to do it.
Biz New Orleans: Are you seeing an increase in activity for refinancing loans right now?
Mark Higdon: Yes, we have seen a considerable uptick in the refinancing of loans. The main reason for this is that interest rates have been at historic lows for quite awhile now, and people have taken notice due a general knowledge through word of mouth, the media and a wealth of advertising by banks and mortgage companies.
Biz: Would you say more people are interested in refinancing business loans, cars, school loans or home loans?
MH: We see more people interested in financing home and business loans, because that is what we do. That is not to say that the other loans are not being refinanced at the same rate, but student loan rates have been low for awhile, and auto loans generally don’t have as large a balance as a home loan or business loan. Thus, people seem to be more interested in refinancing the higher loan amount loans, since those offer more savings and can allow for the cashing out of money by using equity in the properties.
Biz: Who should consider refinancing and why?
MH: There are many reasons to consider refinancing.
• lower interest rates;
• get rid of private mortgage insurance (PMI);
• consolidate higher-interest debt, pay for tuition, buy a second home, invest in other property, etc. if (they) have equity in their property
• [refinance] into a shorter term and thus save on interest by paying the loan off early
• escape an adjustable-rate mortgage by securing a fixed-rate mortgage
• merge loans into one such as a second-home mortgage or a home-equity loan, which may allow (them) to pay one low mortgage rate
• remodel to increase the value of their property
• move from a recourse loan (one with personal guarantees) to a non-recourse loan (one without any personal guarantees and one where the only security a lender is holding is the property itself).
Biz: Who should hold off and why?
MH: Folks that don’t plan on staying in their home or plan on selling their commercial property within less than one to two years are probably not going to recognize the benefits due to the cost of refinancing not being recouped over time. Also, refinancing a 30-year loan back into another 30-year loan may not make sense if the interest rate they are currently paying is relatively low, as this may cost more in interest over time compared to what you may save.
Biz: What challenges are most people facing with their refinancing?
MH: Since the stock market and mortgage crisis several years ago, stricter guidelines have been put into place with regard to getting and refinancing a loan. Prior to such, getting approved for a home loan or refinance for instance was relatively easy. In the old days, lenders could work off of lax underwriting standards, but those days are gone. Today, verifiable documentation of income is paramount and strict debt-to-income ratios must be adhered to by lenders and their underwriters. Further, a good credit score is crucial.
Biz: What advice can you offer to make the process easier?
MH: A borrower should ensure that they pay their bills timely so that their credit score is good. They should strengthen their balance sheet by paying off or keeping a low balance on credit card and consumer debt and saving as much money as possible. Keeping detailed records and keeping them updated is crucial for a business, so that P&L (profits and losses) and balance sheet statements can be readily available if you are a business, and the same goes for an individual with regard to saving W-2s, tax returns, bank statements, 401(k) and other investment account statements.
Biz: Do you have any other tips?
MH: Borrowers should assess their situation as discussed above. Will they be staying in their property long enough to recoup the cost of refinancing? Does the rate and term make sense? Borrowers should shop around and do their homework. Rates and terms can vary significantly from lender to lender. Further, a borrower may be able refinance without closing costs depending on the borrower’s situation and the lender – look for incentives from a lender.
Biz: Is there anything else you’d like to add?
MH: There is a lot of information on the Internet that any borrower can research, which will provide a standard list of the pros and cons of refinancing. A borrower should look at as much information as possible, assess their situation and, if they know any, talk with people in the industry to become as educated as possible in order to make the right decision about whether or not it makes sense to refinance.
Three Things to Know When Refinancing a Mortgage
Refinancing a mortgage is not one-size-fits-all. There are myriad choices and much of it depends on the borrower’s existing loan. Ross Miller, president of Miller Home Mortgage, LLC in Metairie, is a big proponent of conventional financing through entities such as Freddie Mac and Fannie Mae, but says consumers should do their research and work with their financial planner and loan officer to determine the best course of action, if any.
“The three things people should know when they want to refinance are their own goals, the cost to achieve them and what are their expectations,” says Miller, who offers the following advice:
Know what you want to accomplish. Is it a lower interest rate? A lower monthly payment? A shorter term? Or maybe cash back for a particular purpose? You should have a plan going into the refinance and stick to it.
Review the cost to accomplish your goal. Does it make sense to pay points up front to obtain a lower interest rate? How long is it going to take for you to break even? Should you take a higher interest rate but do a no-cost refinance? By the way, there are not any free refinances. They all have cost, it just depends on whether you pay it in the loan amount, out of pocket or in the rate.
Have appropriate expectations. Lowering your interest rate from 4.75 percent to 3.75 percent is not going to save you $500 per month in most cases. Expectations from each borrower are different. If you are looking for a $200 monthly savings, that may be doable on an average loan amount but you may have to take a longer term. If you are looking for a shorter term, then usually you are going to have a higher payment. Just have your expectations in line.