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refinance

victorian-houseWhen I purchased my home three years ago I thought I was getting a steal at 5.875% APR, why would you ever want to refinance a loan like that I told myself.  Times have changed and rates have reached the lowest either I or my Mortgage Broker have ever seen them.  If you have been thinking about refinancing your mortgage there is no better time than now to go ahead and do it.  After a few text messages and discussions on current rates we decided to refinance our primary mortgage. We are in the throws of refinancing right now and we are looking to pull a pretty good rate, around a 4.5% that is a pretty big change from the 5.875% we are currently paying.

There are a few things you want to look out for when doing a refi, the most important thing, IMHO, is to not stretch your loan back out. If you are 5 years into a 30 year mortgage why add those 5 years back on? We are working our current deal for a 20 year mortgage, this is going to shave 6.5 years off our loan without noticeably affecting our payments.  We are getting a good deal on the loan but are still going to have to pay some fees upfront to get the deal completed all told we will probably be paying a little less than $3k out of pocket.  That seems like a lot of money but if you look at it over the long run the savings speak for themselves.

My buddy decided to run the numbers for me to see what the amortization of my current loan and my new loan would be compared to each other, the results not only surprised me but blew him away as well. The difference was over $100k. The cost associated with closing on the new loan is minimal compared to the savings you would realize through the refinancing.  Based on the two different amoritizations, I would end up paying more in interest on the 30 year loan than the loan balance itself, for the new refinanced loan it would cost just over half as much as the actual loan balance. The following two graphics show the balance of the loan in relation to the total interest paid.

5.875APR for 30 Years

5.875APR for 30 Years

4.5%APR for 20 Years

4.5%APR for 20 Years

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With a large number of people in America currently trying to refinance their mortgages it begs the question should you allow the lender to manage the escrow account?

A friend recently refinanced his mortgage and opted out of escrow accounts with his lender.  At first I thought this was some joke that he made up, I didn’t know you could even do that.  It just makes sense for the abnk to require you to Escrow to protect their investment.   When I asked him why he said why give them your money so they can make money on it. Man!  I feel kind of like an idiot now for paying escrow, but then I thought to myself “is it really worth it?”

To start with most lenders will require you to pay an additional fee to opt out of escrow payments, some lenders may charge a flat fee and some may charge .25% of the loan. We will assume it was $500 or .25% of a $200,000 loan.

Let say you have moderate to low property tax on your mortgage and your total monthly contribution to escrow is $190.00, keep in mind you will build the savings up through the year and then back to zero for the start of the next year. At $500 how long would it take for you to make your investment back.

At 1.85% APY you would only make around $19.32, that first year. If you continue to keep your earnings in the account year after year it would take 22 years of your 30 year mortgage to break even, see the below pretty little graph.

escrowsavings

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The U.S. Treasury department today released details of the Homeowners Affordability and Stability Plan.

This plan is intended to provide assistance to homeowners at risk of going into default, currently in default, or whose mortgage exceeds the value of their home.

The plan consists of three main components

Refinancing for “Responsible” Homeowners

  • a Program for homeowners who had conforming loans with or guaranteed by Fannie or Freddie to allow them to refinance at lower rates even if their LTV is higher than 80%

Stability Initiative

  • The Stability Initiative applies to “At Risk” homeowners who have a high debt to income or whose home value is now less than their mortgage value. Additionally you do not have to be behind to qualify
  • Responsibility is shared by the lender and the treasury, the lender will have to reduce rates to make the payment no more than 38% of the owners income, the plan will match the reduction down to 31% for the borrower, the lenders will be required to keep the lower rate for 5 years then they can step it back up to a conforming rate. (Sounds like a fancy ARM to me)
  • Lenders will be paid $1,000.00 for every mod they complete
  • Mortgage holders who are current but “At Risk” will receive a $1,500 incentive to mod before they are behind, servicers get $500.00 if they agree to the mod of a current account
  • Borrowers who have had a modification will receive a $1,000.00 per year balance reduction for 5 years provided they stay current… WHAT??? I need to get behind on my payments man… damn.

Support Low Rates

  • The treasury is increasing its funding commitments for Freddie and Fannie from $100 billion each in preferred stock purchase agreements to $200 billion each.
  • The $200 billion commitments are not made from funds in the Financial Stability Plan or the TARP program they are from the Economic Recovery Act.

I personally don’t like the plan nor do I support it. What do you think? Are you going to apply for a mod?

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