Investment Mortgage Guy

Mortgage rates dipped to 4.875% today on a 30 year fixed mortgage. The Fed has committed to buying up mortgage backed securities which is causing interest rates to be lower than we have seen in 60 years. Depending upon your current interest rate, A mortgage rate in the 4% range could have a huge impact on the amount of interest you will pay over the life of your loan. If you plan on staying in your home at least 3 years or more, you should take some time out to see what a refinance could do to benefit your current financial position. In this article, I will give you some tips that may help you make an intelligent and informed decision about whether or not to refinance.

Tip#1 – Consider the Term- Be aware that every time you refinance, you will start all over in your amortization schedule with the bank. These amortization schedules work in the bank’s favor. Almost your entire payment goes to interest at the beginning of the loan. For example, If you have a $200,000 mortgage at 4.5%, your principle and interest payment is $1013.37 per month. Out of that amount, $750 goes to interest and $263.37 goes to principle.  Instead of going back to the 30 year fixed loan, consider doing a 25 or 20 year term. A payment on a 25 year term is only $1111.66, however $361.16 each month is going to principle and you will save an addtional $60,802.20 over the life of the loan in additional interest costs. Not bad for only $100 difference in payment.

Tip# 2 – Watch Your Credit Score. – In the past, whether you had a 620 credit score or a 700 credit score, your rate for a conventional loan was the same.  In today’s restrictive credit market, Fannie Mae has added several risk levels that will increase your interest rate. The difference in rate between a 620 score and 740 score can be as much as three quarters of a point.

Tip #3 – Make Sure You Know Your Appraised Value- Many people will not be able to take advantage of the current low mortgage rates because they owe more than their home is worth. I recommend you spend a little time researching this before you get too excited about refinancing.  Go to www.zillow.comand you can get a quick estimate on what your home may appraise for in today’s market. Fannie Mae is looking for comparable homes in your neighborhood that are a similar style to yours that have sold in the last 90 days. Foreclosed homes sold at rock bottom prices in your neighborhood may dramatically effect what your home will appraise for.

Tip #4 – Don’t Get Greedy – Have you ever lost out on something because you waited too long? Last year, rates dipped to 5.25% for about 4 hours. After that, they immediately jumped to 5.5% and a week later, they were back up to 5.75%.  When I notified several customers about the dip to 5.25%, a common response I got was, “I want to hold out until rates get to 5%”.  It would take another 6 months for rates to get that low again and it is mostly due to the Fed stepping in and giving us a hand. Many of those clients, couldn’t wait that long and had to take a rate well north of the 5.25% they could have had. My point is this, do your homework, find out what rate will work for you and your family and tell your mortgage banker to lock you if rates hit your target. Don’t get emotional about trying to find the absolute bottom. Most likely, you won’t be lucky enough.

Tip #5 -Ask For Discount Points –  Ask for a quote at 1 and 2 discount points as well as the traditional no discount point quote.  In the past, you might pay 1 discount point to get  .25% better in rate. On a $200,000 the difference between a rate at 5% or 5.25% is $31 per month. If it costs you $2000 more upfront, it will take you 64 months or over 5 years to break even. In our current mortgage market, I have seen as much as a .75% difference rate for 1 discount point.  On a $200,000 mortgage, the difference between 5% and 5.75% is $94 per month. In this case the break even is only 21 months. After that, you are money ahead. Make sure you request these options from your mortgage banker. Most Bankers are not accustomed to providing you with this information since in the past discount points weren’t very attractive.

For a full analysis and more tips for your personal situation, feel free to give me a call at 952-808-2820.

Rob Bonahoom

Mortgage Coach