Is it Time to Refinance? Read this First.

• Always make sure your refinance lines up with your long-term goals
• Never pay for closing costs


When was the last time you checked on your investments?

If you’re like me, you herd your money like Blue Heeler cattle dog, and change course the moment something doesn’t perform to your expectations. So why is it that so many people ignore their biggest asset of all: Their home?

It’s only the biggest investment they might ever make, and treating it like a set-it-and-forget-it investment is just a terrible way to handle it. Could it be that people don’t think of their mortgage as an investment because it’s a form of debt? Maybe. But I think that’s a serious mistake.

As the market moves, the way you finance your home should too, so you can save money and optimize your equity and wealth. Here’s what you need to know to make the right decisions about your mortgage.

The Math Must Work

Now, it’s no secret that I’m a mortgage guy, and it’s in my interest to have you get your mortgage through me, or refinance it once you’re settled in. But I have a rule about this: You should always and only refinance when the math works to your advantage, now and in the future.

I’ve seen far too many people miss phenomenal opportunities to refinance. But I’ve also seen far too many people refinance way too often or at the wrong time, so that they end up exactly where they started (or even owe more).

There are three horrible reasons why this happens:

  1. Love ‘em and Leave ‘em: People don’t know or think they should refinance, because their lender abandoned them after they got their mortgage and left them to fend for themselves.
  2. Save now and pay later: People refinance because they think the prevailing rate is better than what they have — but end up paying more because of outrageous closing costs.
  3. Fear of missing out: People refinance because rates are at an “historic” low. They get lured into a heavily advertised online loan that’s not right for their circumstances. They neglect to realize that refinancing must be part of a long-term investment strategy that considers how long you plan stay in your home.

The Golden Rule of Refinancing

The most important rule of refinancing is simple: get your original mortgage from someone who cares about your financial well-being. What you want is a lender that wants a long-term relationship with you, who will proactively tell you when it’s advantageous for you to refinance.

Think of this loan officer as another one of your financial advisors. Their job is to keep you up to speed on market movements that can work to your advantage.

You may not know how the geopolitical events in the world affect the bond market, but your loan officer does. You should not have to track which way the bond market will move after a hurricane, but your loan officer does. You should never have to think about whether your PMI can be eliminated now that your equity has increased — that’s your loan officer’s job.

Plain and simple, work with a loan officer who you like, and likes you.


Shameless self-promotion here: At Downs Capital, we fanatically track every client’s loan to ensure that it is competitive to the market, and fits your financial goals. You can count on us to contact you first if we think we can improve your rate and save you money.

Closing Costs: To Pay or Not to Pay

The second general rule of refinancing is simple: If you don’t have to pay anything to reduce your rate and save money, that’s exactly the right thing to do no matter how long you plan to live in your home. Go forth, refinance, and save money. Do this all day, every day.

But if you’re thinking about paying closing costs, look out. If you move within 2-5 years after paying another round of closing costs for your refinance, you’re essentially throwing that money down the drain. That’s because you don’t get closing costs back, and you need to take them into account when you evaluate how much money a refinance could cost you.

Here’s some math to illustrate my point.

If your payment on your new loan is $100 a month less than your existing payment, but your closing costs are $5,000, you’ll need to stay in your home for more than four years (50 months!) before you start realizing those savings. I’ll say it again: beware of closing costs.

Here’s a little parable about one of my clients, Ann, who had refinanced three times with other lenders after getting her first mortgage in 2009. She was convinced that getting a new loan at a lower rate was the right thing to do.

Yet because Ann paid enormous closing costs with every refinance, her mortgage never went down. By the time she turned to us, her loan balance was actually higher than where she started. That’s not how refinancing should work — and it’s another reason I hate closing costs.

But … those rates are so crazy low!

So you’ve decided to refinance.

What’s right for you? Unfortunately, it’s not always an easy answer, particularly if you have private mortgage insurance (PMI), a second mortgage, or a change in your credit score. But none of those things are insurmountable. It’s just a matter of monitoring the market and figuring out what’s right for you.

Here are a few rules of thumb:

  • If your loan is less than $250,000, look for rates that are at least .50 percent better than your existing rate.
  • If you have a large mortgage, even an eighth of a point can make a difference. The larger the numbers, the smaller the percentage must be to make it worth your while.
  • Calculate your annual savings by multiplying your loan amount (let’s say $325,000) by the interest rate savings (let’s say .625 percent). That equals $2,187 in annual savings — not too shabby! (And remember … we can always help you run the numbers.)
  • Even if the rate isn’t that much better, if you can refinance to eliminate PMI (because the equity in your home is now high enough to get rid of it) you will probably still save money (and that’s always a good thing).
  • Combining your first and second mortgages into one loan with a rate that is lower than the average of the two is always a good idea.
  • Don’t overlook adjustable rate mortgages (ARMs). Sometimes, this type of loan is perfect for the short-timer (meaning you plan to move within the next 2-7 years) because the payments are low — and you’ll probably move well before the payments go up.

The Benefits of Refinancing

Since we’re constantly in touch with our clients about their loans, it’s easy for us to see how refinancing can transform people’s lives. Here are a few case studies (I’ve changed the names of our clients to protect their privacy):

Mortgage Magic

We helped Joe, a veteran in his 60s buy his very first home using a loan from the Veterans’ Administration. He had a great pension and a full-time job, and took out a $647,000 loan at 4.625 percent. Now you might say, why is that rate so high? Simple: We used some mortgage magic to get him a substantial closing cost credit, which enabled him to buy a home sooner than he had originally planned.

Now here’s where the refinance comes in: We knew that Joe’s great credit would allow us to do a no-cost refinance to a super competitive rate of 3.875 percent. Because we covered every cent of his closing costs, plus his VA funding fee, his annual savings was $4,500.

Getting Rid of PMI

I always say it’s far better to buy than to rent, and to start where you are (right now!).  Don’t wait to buy if you can squeeze your way into the market. That’s exactly how our clients Sue and Bob got started in January 2015. They didn’t have much money to put down, so they used an FHA mortgage of $565,000 at 3.875 percent. The only hitch? Their small down payment meant that they had to pay PMI, which made the payment real rate on the loan nearly 4.725 percent.

Yet here’s the enormous upside: Over the last two years, their house has appreciated to the point where they have enough equity to get a conventional loan at 3.99 percent, with no PMI. That’s going to save them more than $4,000 a year, and because it’s a no-cost refinance, they can start realizing those savings right now.

Life Changes

Sometimes our clients’ life circumstances change — and we can help design a mortgage solution that makes it easy for them to move on to the next phase of their lives. In this case, our client Ahmed bought a $775,000 house in September 2015, with 10 percent down and a first and second mortgage. When we called him last month to talk about consolidating his mortgages to improve his rate at no cost, we learned that he would be transferred in five years or less.

That’s why we helped Ahmed get a seven-year ARM, because with a rate of just 3.25 percent on the newly consolidated loan, he would save more than $6,000 a year. He’ll move well before the rate resets — and it’s smarter to pay less while allowing the house to appreciate before he moves.

 

The Takeaways

As much as I love a good refinance, I want you to be an enthusiastic skeptic when you think about refinancing your own mortgage. Don’t fall for an offer that doesn’t pencil out for you. Always run the numbers against your timeline. Look for a no-cost refinance, and don’t let anyone tell you it can’t be done.

And here’s the biggest takeaway of all: If you have a question, need help to run the numbers on your loan, or want to talk about the state of the market, call us at 202.899.2600.