Thursday, January 1, 2009

When Is It Time To Refinance? (Part 1 of 6)

A long-time, good client of mine recently asked “how do I know when it makes sense for us to refinance? Is there a set rule of thumb we should follow?”.

Well, there really is no set in stone rule, as there are so many variables involved in determining this. I know a lot of people use a very rough rule of needing to reduce your interest rate by at least 1%, but there is so much more that needs to be considered than just the interest savings alone.

One of the most important determinations my clients and I make together is what their main objective is and which loan program offers the pricing that best helps them meet that objective. For example, not all that long ago, for the person holding a property for a short time whose monies may have been tied up in the stock market making a nice return for them, the Option ARM (adjustable rate mortgage) may have been the best choice for many of them, as while they were paying the initial low interest rate they could leave their investments where they were at, bringing them great income.

But, this situation only fits a small segment of those seeking financing. More often, people are looking to refinance in order to:

  • Exchange an existing adjustable rate and/or interest only mortgage for a low fixed interest rate
  • Consolidate mortgage(s) and/or other bills
  • Exchange an existing fixed rate mortgage for a lower fixed rate mortgage
  • Take a substantial amount of cash out from equity in order to do long overdue updating or purchase a retirement home while prices are low

As with all your major financial decisions, you should include your tax professional in the loop during the decision making process. The professional services of your tax expert could help you avoid serious tax consequences. Don’t you think the fee they charge you might be small in comparison to the tax liability a mistake could bring you?

To keep these articles manageable in size, I’ll be addressing each case in its own post, as well as some common hurdles being faced in today’s lending environment. Until then,

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

When Is It Time To Refinance An Adjustable Rate or Interest Only Mortgage? (Part 2 of 6)

Does it sound crazy that someone would give up an interest rate in the low 4’s to take an interest rate of 5-5.25% - AND spend thousand of dollars to do it? Many people today are doing just that. “Why?!?!?” you might ask. Well let’s look at some history and basic Econ 101.

What eventually happens after a government prints trillions of dollars and pours it in to its economy? INFLATION! What is the evil nemesis that triggers interest rates on mortgages to shoot up? INFLATION! Forget the effects of shouting “Fire!” in a crowded theater, as this will be nothing like the stampede many believe will be storming through the gates when INFLATION becomes the common call we all hear in the news.

Don’t get me wrong, I’m happily paying the extraordinarily low interest rates we have on our home equity lines of credit, grinning from ear to ear at such “cheap money”. But, folks, these interest rates are NOT NORMAL, and like the high housing prices many thought might go on forever they are UNSUSTAINABLE. I’m just grateful that our home equity lines of credit have terms that allow us to make a simple phone call to lock in a fixed interest rate on it when the tide turns, which it inevitably will do. I’m expecting to be on hold for quite a while the day I make that call while our bank sorts through the many other people frantically trying to so the same thing.

So, what if you have a nice low adjustable interest rate? Why would you want to pay the closing costs associated with refinancing AND/OR take a higher interest rate than you are presently paying? Well, I don’t know about you, but MY crystal ball seems to be a bit foggy. There is no clear projection on WHEN the interest rates will rise, nor HOW FAR or HOW FAST they will rise. What happens if you have a projected interest rate target, and you miss it? If you end up with a higher rate for the long term fixed rate mortgage you refinance in to, did hanging on to the lower adjustable rate a while end up costing you much more in the long run? So, maybe you give up 3/8% in annual interest savings for a year, but then you end up with ½% higher on the fixed interest rate for the long haul.

Gauging this exactly is as easy as gauging “the bottom” in the real estate values…we’ll only know it was there when we’re looking back. So, taking in to consideration that we presently have interest rates we haven’t seen in many decades, do you think it’s a pretty good gamble to take to lock in a fixed rate now?

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

When Is It Time To Refinance to Consolidate Mortgage(s) and Other Bills? (Part 3 of 6)

Would you believe there are many people out there with 20-30-40-50% equity in their homes, even based on today’s current market values? Even people who own their homes free & clear of any loan? Some people look at their long term financial objectives, which may include paying their home loan off within a certain period of time, look at their budget, and steadily chip away at their loan balance. I realize we don’t hear nearly as much about these folks in the media, but trust me – they DO exist – and there are quite a few of them in the U.S.!

I have heard from such people who are looking at their future plans which include putting their kids through college, finding their retirement home or updating the home they’ve decided they’ll be staying in for the long term after all. Some of them had unexpected expenses they incurred debt for, and are looking to shuffle things around with mortgage interest rates so low. Dealing with that four letter word l*i*f*e, there are always unforeseen events cropping up, including those that affect us financially that we may or may not have been able to set aside the reserves to cover.

So, maybe it is time to shift that $50,000-70,000 worth of student loans in to a more tax advantages form of debt. Maybe it is time to buy that retirement home while values are so low, renting it out until the market turns around or the last child is launched, and it’s time to sell an existing primary residence. Maybe a young person/couple whose income has increased dramatically is looking for a second home and/or restructuring of their financing for tax purposes. Maybe your tax professional has done some year-end consulting with you and recommended a debt load be shifted around.

These are the types of scenarios which come with very specific individualized goals where a set rule of thumb cannot be used to gauge if interest rates are “low enough” to refinance. So many questions need to be answered, like:
  • How much is the interest being paid on each debt being consolidated?
  • What would the retirement home rent for, and how much needs to be put down to have it “hit break even” until it is moved in to as a primary residence?
  • How long will the home being financed be held?
  • What eligible tax benefits are available?

There really is no set rule of thumb that may be applied in these scenarios. An individual’s plan needs to be looked at and its variables taken in to consideration. Maybe other savings need to be applied to the transaction, or partial debt rolled in with the monthly savings applied to paying off the balance not paid off.

This is where bringing in the professionals to help analyze your individual plan becomes crucial. And this is also where I am reminded to thank those people who have shown the confidence to include me in their decision making processes. It is with great satisfaction I see so many people succeeding with their real estate ownership, and I’m grateful to be a part of their success.

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

When Is It Time To Refinance An Existing Fixed Rate Mortgage for a Lower Fixed Interest Rate? (Part 4 of 6)

This is the type of transaction where the rules of thumb are most likely to come in to play. A homeowner or investor is strictly looking to reduce their existing interest rate and/or payoff their mortgage faster. And here is where many people are told they need to save at least 1% on the interest rate to make refinancing worthwhile.

But again, there are variables that need to be considered:
  • What are the closing costs associated with the transaction?
  • When is your “breakeven point” when the interest savings will have covered the costs associated with the transaction?
  • How long do you plan to keep the home/property?
  • How far are you in to the repayment of your existing mortgage(s)?

I’ve spoken with many people who are “waiting out the real estate market”, waiting for when this current cycle turns and their property values increase. We can only give this our best guess on how long this will take, but a guess needs to be made to try to make sure the costs will be recovered within and the benefit of the lower interest rates seen during that period of time. Some people have no intention of ever selling their home, and having a longer period to hit the “breakeven point” would be okay. Others have had their existing mortgage for many years, and a lot more of their payment is going toward reducing their principal than paying interest, so how much interest remains to be paid based on their amortization schedule comes in to play. Still others experience such a dramatic improvement in their existing rate that the costs are offset very quickly.

This is where it is critical that you: a) talk to your financial planner/tax advisor and b) go to someone you know and trust to talk about your financing, someone whose goal is to help you meet your goals and objective, not just make a profit from you.

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

When Is It Time To Refinance to Cash Out a Large Amount of Home Equity? (Part 5 of 6)

There are some pretty financially savvy people out there carefully watching what the markets are doing, including the bond markets and mortgage interest rates. Over the years, they’ve listened carefully to their financial/tax advisors and have educated themselves, keeping up with what these markets are doing. They caught the wave of low interest rates several years ago, and already have a nice low fixed rate on their mortgage.

But, the time has come for them to take some equity out of their home/property, maybe for one of the reasons listed in Part 3 of 6 of this series of articles. If they already have an interest rate of 4.5%, and the interest rate they might qualify for today is 4.625-5%, why would they want to refinance? Should they instead take a 2nd mortgage loan or line of credit? Should they just sell their home/property and pay those closing costs instead?

Once again, several variables need to be considered:
  • How much cash out will they need, and for what purpose? What tax ramifications are they facing for this purpose (contact your tax professional!)?
  • What is the “blended rate” if the cash out was taken in the form of a 2nd mortgage?
  • What is the difference in closing costs between taking a 1st mortgage and a 2nd mortgage based on the lower loan amount, or a “no cost” home equity line of credit?
  • If the property securing this loan will be eventually sold, what is that projected sale date?
  • If the property being refinanced will be held long term, where is the owner in their amortization schedule on their existing mortgage?

Now I’ve said this over and over again, but under this reason for refinancing you especially need to talk to your tax professional before you subject yourself to tax consequences and incur unforeseen or avoidable tax liabilities. Believe me, I speak from experience, having incurred an unnecessary capital gains tax liability on a transaction I did in 1989 without consulting my tax advisor. One of those really expensive school of hard knocks lessons I’d like to see others avoid!

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –

When Is It Time To Refinance? – Common Obstacles In Today’s Lending Environment (Part 6 of 6)

It is hard for me to believe the percentage of people who have inquired about a home loan with me I have had to tell I couldn’t help due to one reason or another. In 25 years in this business, I’ve never seen so many! Here are some of the most common reasons for the people I’ve talked with:

  • Estimated Market Value determined by an appraisal is insufficient to support the loan amount you wanted to borrow.
  • Need Stated Income program due to self-employment, but these programs are no longer available.
  • Declining Market Value Area determination restricts your loan amount by 5%
  • Wanting to know you are getting the lowest interest rate, timing the “bottom” of the market, but missing it by procrastinating or gambling on waiting and having low distress sales further decrease your property’s value.
  • You haven’t been monitoring your credit, and an error was discovered when you applied for your loan and/or creditor(s) lowered your credit limit sinking your credit score due to the ratio of amount owed vs. the account limit.
  • Your revolving/installment debt balances increase and/or your income has declined, so now you don’t meet the tighter debt-to-income ratio criteria many programs have.
  • You fall in to the "Jumbo Loan" category, a market that has been turned upside down due to the exit of the investors who provided the funding for these loans, and the available interest rates are too high.

Now more than ever we need to remain proactive with monitoring our credit, limiting our credit usage, budgeting, and investigating as best we can the financial companies we are looking to do business with.

See you at the closing table!
Karen Cooper – OR/CA Mortgage Consultant –