Refinancing? The Grass Isn’t Always Greener

grassMy client made the right decision last week. He decided not to refinance his mortgage – even though:
(i) he qualified for a better interest rate (because his credit score had improved),
(ii) the value of his primary residence was way up, and
(iii) he could have used some of the equity in his home to consolidate debt.

His credit score was 650 – lower than what he had hoped for, mainly because of some unavoidable late payments a while back. Keeping his loan-to-value ratio at 80% (to avoid mortgage insurance premiums), he was surprised to discover that, with his credit score, he would still be assessed 3.0% of the loan amount at closing. In addition, because he was looking to pull out some equity (i.e., obtain a new loan greater than his existing loan amount), the “cash-out refinance adjustment” would have been another 2.625%. Along with a couple of other incidental adjustments for loan size and overall risk profile, the cumulative risk adjustments would have been 5.85% of his requested loan amount – or $5,850 on a $100,000 loan.

Sure – I found a lender who would offset all of these costs. The problem was his interest rate would be no different than the rate he already had on his existing loan. Also, his principal amortization schedule would reset upon the commencement of his new 30-year mortgage. Therefore, the portion of his new monthly mortgage payment attributed to principal reduction would be less than what his principal payment was under his existing loan.

Here’s the Point: Make sure to understand all of the “risk adjustments” (costs) that lenders assess before you refinance your mortgage – because you might be surprised.

 

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Dedicated server - April 2, 2017 Reply

With interest rates hovering near all-time lows, we see commercials and ads for home refinancing all the time. By choosing a new loan with a lower interest rate and better terms, the experts say, you can lock in a lower monthly mortgage payment, extend or reduce your loan s term, and pay less in total interest.

    Michael J. Kanuka - April 2, 2017 Reply

    Thanks for your note. No doubt most people should be able to reduce their monthly mortgage payment by capitalizing on the lower interest rate environment – especially when they can get a lower rate than the rate on their existing mortgage. However, the point of my article was to caution people that the refinancing costs aren’t always as good as they appear initially. Your out-of-pocket dollars will be dependent not only on the interest rate differential, but your FICO score, loan-to-value ratio, and the amount of funds being requested relative to your existing loan.

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