Why Refinance Back into a 30-Year Loan?
One of the biggest reasons homeowners refinance their mortgage
is to obtain a lower interest rate and lower monthly payments. By
refinancing, the borrower pays off their existing mortgage and
replaces it with a new one. This can often be accomplished with a
no-points no-fees loan program, which essentially means at "no
cost" to the borrower.
In the no-points no-fees scenario, the mortgage consultant
uses rebate monies paid by the lender to pay off non-recurring
closing costs for the borrower. These are "one time" fees such as
escrow or attorney fees, title insurance, document preparation,
tax service, flood certification, processing and underwriting
fees, etc. The borrower is still responsible for recurring fees
such as interim insurance, property taxes or insurance policy
Refinancing typically occurs when mortgage interest rates drop
significantly, but borrowers with recently improved credit scores
(from paying off credit card debt, making mortgage payments on
time, etc.) are often candidates for better interest rates as
well. If you haven't checked your credit score in a while, it's a
good time to call a mortgage consultant.
The question most asked is, "But why should I go back into a
30-year loan?" There are two schools of thought on this subject,
and the mortgage consultant should work hand-in-hand with the
borrower's financial planner to determine what works best for
their mutual client. One option is to take the route of the "same
payment" refinance, and actually pay off the loan faster and save
money on interest fees in the long-run. If refinancing results in
a lower monthly payment, the borrower can still continue making
the same payment they made in the original loan, and the extra
money will be applied to the principal balance.
For example: Let's say you have 25 years remaining in your
current loan, and you refinance back to a 30-year loan with a
slightly lower interest rate, resulting in a payment reduction of
$200 per month. (Note: This is just an example. The actual amount
could vary.) You could then take that extra $200 per month and
apply it toward the principal on the new loan. At this rate, the
loan will be paid off in 22 years and 4 months, which is 2 years
and 8 months less than the original loan.
On the other hand, if the borrower's financial planner is a
proponent of best-selling author and investment guru Douglas
Andrew's philosophies (see Missed Fortune), he or she may suggest
investing the extra money in a side-fund that could earn a better
rate of return and grow to the amount of the mortgage (and
beyond) in even less time. This method provides excellent
liquidity, but having more direct access to this money may be too
tempting for some homeowners.
Regardless of the reason for the refinance, the mortgage
consultant will need to know what the existing loan scenario
entails, review the homeowner's long-term goals, and provide a
comprehensive spreadsheet that compares and contrasts the various
loan programs available. Bear in mind, refinancing to obtain a
lower interest payment could also result in a lower deduction at
tax time. The homeowner's mortgage consultant and financial
planner should work hand-in-hand with their mutual client's best
interest in mind.
Jansen Drake is affiliated with 1st Metropolitan Mortgage, a
Georgia Residential Mortgage Licensee 15506. For free
consultation and a copy of The Certified Guide to Credit Scoring,
call Jansen at 678-388-1755 or go to http://www.catquickloans.com
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