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Insider Tips
I was talking with a fellow loan officer the other day. We were discussing the pros and cons of refinancing our own homes over the last several years, and sharing how we each counsel our clients in that regard. In general we agreed on everything the other was doing, but I did notice a place where I could improve my presentation. So I thought I would share that with you. Thanks Dave! Most people who own homes have heard about the 2 year rule. In short, you should only refinance when you can recoup the costs of doing so in 2 years or less. That is an industry standard that any ethical loan officer will also recommend. But there are other elements that should go into that decision. What if you are refinancing from a 30 year fixed rate to an Adjustable Rate Mortgage (ARM)? Many of those products make it easy to break even in 2 years, but you may end up giving all that saving back (and then some) in subsequent years when it starts adjusting. What about loans with “interest only” payment options? Those are easy to fit into a 2 year break even analysis, but may likewise bite you later. My advice it that you need to spend some time first answering 2 key questions. The first question is, “What is my goal at this point?” Based upon my retirement planning, do I want to own the house free and clear some day, or just reduce my cash flow? The next question is, “How long do I plan to hold on to this property?” That may include not living there yourself, but converting the property to a rental for instance. With these 2 key questions answered in your own mind, you will find it much easier to make a sound decision when you are interviewing mortgage companies. It will become much clearer, much faster, which loan officer is really listening and which product will best suit those needs. But this month, I want to focus on the concept of home ownership. It is a concept that our generation seems to overlook in large part, compared to our parent’s generation. If this is your goal at some point, then refinancing can hold some additional pitfalls you need to consider. Most refinances are based upon 30 year terms. So your chief concern in this case should be reducing the term of the loan, rather than using the new payment in any break even analysis. By that I mean, look at an amortization chart for your current loan versus the new loan you are considering. How soon will you outstrip the equity accumulated in the old scenario, to offset the closing costs? Your payment may stay virtually the same, but a reduced term will always add equity at a faster pace. I would also suggest playing this game using only fixed rate products. It doesn’t seem to make any sense to me, to put yourself in a position where you may be forced to refinance somewhere down the road. That may have the effect of derailing your timeline to ownership, since you don’t know what the rate environment might be in the future. In summary, don’t put off the idea of ownership for too long if that is your goal. The temptation of a reduced payment may have strong appeal, but starting the 30 year clock over and over again will not help you in the long run. For professional advice on any aspect of home finance, call the expert. Dan Smith can be reached at 303-674-0201 or visit him at www.ColoradoHomeLoans.com © Copyright 2004-2007 by ColoradoHomeLoans.com |
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