Rate and Term Refinances are up

Freddie Mac said Thursday that record low numbers of homeowners Cash Out the equity for their home. Most homeowners who are refinancing now are taking advantage of the record low rates and are using Rate and Term refinances. A Rate and Term refinance allows homeowners to lower their interest rate and or terms on their mortgage without taking out any cash. A Cash Out refinance is one where the homeowner uses the equity in their home to pay off debt and or take the cash out for other uses. There are several reasons for the record low numbers including lower home values, tighter lending guidelines, and homeowners who are trying to make more financially sound decisions. Reuters reported on Jan 28, 2010, Freddie Mac Chief Economist Frank Nothaft said that "in aggregate, the lower interest rates translates into about $2 billion in payment savings for these homeowners over the first 12 months of the new loan". They did not report, however, how long the average homeowner extended out the term of their loan by doing this rate and term refinance. Most homeowners believe that the they have to save 1% in interest rate to make a rate and terms refinance worth doing. This is really not true since the rate is only one part of the puzzle.

The best way to look at what you need to save is to first determine how long you plan to be in the home. Then, determine the costs of the refinance. You need to only look at the lender, title/escrow and appraisal/inspections costs. Prepaid taxes and insurances are not a costs, these are your funds. Then figure out what is the monthly savings you are receiving from the refinance. Next figure the number of payments you have left on your current mortgage payments and multiply that by your principle and interest payments. Then figure the total of payments on the new loan. If you are planning to be in your home for long term, then do not close on the new loan if its total payments are greater than your current loans total of payments. If you're not sure how long you are going to be in the home, the best way to find out if the new loan is going to help you is to take the monthly saving on the principal and interest for the old and new loan. Divide that into the costs of the refinance. This number will represent the number of months you will need to be in the home before you start seeing actual savings. Please see the examples below.


Example 1. Current loan balance $150,000. Current rate 6.5% 29 years left. Payments $960.74
Proposed New loan 5.% interest rate 30 year mortgage $2354 in cost for home loan. New Payment $817.87
Savings $142.87 monthly / costs of $2354 = 16.48 months to start having true savings.
Using the total of payments method the new loan with the lower interest and including the costs of the loan the savings in payments would be $49,079.
Since this home owners is planning to be in the home for more that 17 months this would be a smart refinance to do.

Example 2. Current loan balance $398,000, current rate is 6.00% with 28.5 years left, and payments of $2356.23.
Proposed new loan 5.125% interest, 30 year mortgage and $5232 in closing costs. New payment is $2195.55 monthly.
This saves the borrower $160.68 monthly / costs of $5232 = 32.56 months to start having true savings.
If this home owner plans to be in the home for more than 33 months then this loan would a smart refinance to do.
The total of payments savings are $52,612.80

Example 3. Current loan was a 30 year fixed with 20 years left to pay. Current balance is $160,981 rate is 6.25% and payments of $1176.67. Total of payments are $432,601. Borrowers has paid $141,200.40 in payments so far.
Proposed new loan is $164,081 at a 30 year rate of 5.125%. New Payments are $893.40 saving the customer $283.27 monthly. Closing costs were $3100.00
If this home owner just pays the minimum payment on the new loan the total of payments will be $321,623 but the customer has already paid $141,200 in payments. The total cost of this home would be $462,823 adding $30,000 to the total. The customer should not do this refinance unless they have to save the $283. monthly but fully understand the total of cost of this savings.
If the customer was to put the $283.27 in savings back into the new mortgage just pay the old payment amount of $1176.76 the new loan would be paid off in 17.7 years saving the clients 28 months in payments from their current loan or $31,770 in total of payments. It would make sense for the borrower to refinance in this scenario.

It is important to talk to a mortgage professional about all of your options. I recommend talking to your lender on the phone once a year. There are so many different loan programs available that you should explore all of your options. You might be surprised to find you could save money with a better loan.