When is a good time to refinance? (2/20/2008)

One of the questions I’ve been asked the most over the last couple of months is “when is a good time to refinance my mortgage?”. As most of you know, we’re in a decreasing rate environment and mortgage brokers are beginning to come out of the woodwork again. It wasn’t long ago that rates were historically low and they seem to be headed that way again.

This is a very tough question to answer because the answer may be different for everyone. The answer to this question is going to depend on the following points:
1. What’s your current rate?
2. What type of mortgage do you have now (Fixed rate or ARM)?
3. How much longer do you plan to stay in your current home?
4. Who’s your lender and what options can they offer?
5. Can you modify vs. refinance

Before I address these points, all of which you can control, I need to mention a very important part of this topic that none of us can control. TIMING! It’s like buying stock. Ideally, you’d like to buy stock at its lowest price and sell at its highest. Unfortunately, you never know when these price points are going to occur. So, ideally you would want to refinance when rates are at their lowest. Unfortunately, you never know exactly when that will be.

Most economists feel that interest rates are going to decrease 1st and 2nd quarter of 2008. As most of you know, the Federal Reserve Chairman lowered the Fed Funds rate 75 basis points on January 22 and another 50 basis points on January 30. The Fed Funds rate is considered a key short term rate which affects the Prime Rate. The Prime Rate is what banks charge for floating credit facilities such as home equity lines of credit and credit cards. In June 2007, the Prime Rate was 8.25%. Today, the Prime rate is 6%.

Mortgage rates are considered long term rates and typically “follow” short term rates. (Opinion alert!!) Short term rates have been going down since September 2007 and with the recent drop last month, I expect mortgage rates to continue to drop well into next month and possibly beyond.

Now, back to the points above…
What is your current rate?
Most people that ask me “when is a good time to refinance?” have no idea what their current mortgage rate is or what type of mortgage product they have. If you got your mortgage between 2002 and 2005, the odds are pretty good that rates haven’t dropped to those levels yet. If current rates are better today than when you got your mortgage, consider refinancing or modifying your mortgage (I’ll talk about the difference below).

What type of mortgage do you have?
Do you have a fixed rate mortgage or an ARM (adjustable rate mortgage)? Fixed rate mortgages have less flexibility and may require a complete refinance to lower the rate. ARMs can typically be modified by your current lender with much less paperwork and cost less than a full refinance. Your mortgage company may have already sent you a brochure or letter outlining this option (I've received three so far). If you have this option, you should consider it. A modification will lower your rate without having to go through the process of refinancing with another lender and the rate is typically very competitive.

If you have a fixed rate mortgage, you should contact your lender to see if they can modify it or refinance it without having to go through the underwriting and documentation process again. Either way, you should check the rates at other institutions to see how your mortgage company measures up.

How long to you plan to stay in your current house?
If you plan on moving soon, it probably isn’t worth the time or money to refinance. However, you can look into modifying since this is a cheaper and more efficient option.

Refinance Tools
There are several tools you can use to see if you should refinance. First, I like to use Bankrate.com (http://www.bankrate.com/brm/ratehm.asp). This website can give you the interest rates of various banks and mortgage brokers in your area. I’ve checked several rates on this site and find it to be very accurate. Don’t forget to factor in the costs of your refinance. According to law, a mortgage broker or banker must provide you with a Good Faith Estimate of costs within three days of receiving your application. These are very easy to furnish so don’t hesitate to ask for a GFE. If you have any questions regarding the figures, feel free to call or e-mail me and I can review it with you.

Another tool is a mortgage calculator. There are several of these on the internet. After you shop around for rates, use a mortgage calculator to determine your monthly payment. Don’t forget to add monthly escrows for real estate taxes and homeowner’s insurance if you want to include these in your monthly payment.

If you still aren't sure what to do, I'd be happy to go over your situation with you and provide some advice. Give me a call or e-mail me with any questions.