There’s an old saying amongst homeowners that you shouldn’t refinance your mortgage unless you can save 1% in interest rate. So in other words, if your mortgage is 5% for example, and you can get for 4.125% on a new home loan refinance, you shouldn’t do it because you’re not saving the full 1%. This information seems to float around amongst financial advisors and self-proclaimed financial gurus. It’s funny, the majority of the people that talk about this 1% savings rule, don’t actually originate mortgages. Most of these people, are the jack of all trades sorts dabbling in home loans, stocks, bonds and various other investments.
Fact: if there is a net tangible benefit to you to refinance, then do it! There is no rule or underwriting guideline from Fannie Mae or Freddie Mac stating that you must save 1% in interest rate. The only underwriting factor is that there must be a net tangible benefit to the borrower. This includes many scenarios with main one being a lower mortgage payment.
When is the right time to consider a home loan refinance?
For Sonoma County homeowners, this can vary greatly, but generally with the way mortgage rates presently are, at their historic lows, most people are refinancing for payment and interest rate savings over the term of the loan. There really is no right time to consider the home loan refinance, the answer is anytime, as long you can justify the costs spent for the cash saved.
Don’t think so?
Here’s an example:
Using our mortgage calculator, take a $300,000 loan amount at an interest rate of 4.875% for a term of 360 months, 30 year fixed. The monthly payment will equate to $1588.54 per month. Lets say you took out that mortgage in the calendar year of 2011. You have diligently pay down the principal balance and now our new loan amount would be approximately $297,000. Using a worst-case interest rate of 4.125%, the new monthly mortgage payment would be $1439 per month. The monthly savings is generated by a difference of $3000 in principal coupled with .75% reduction in rate enabling the homeowner in this situation to save $150 per month. Call the closing costs on securing the new mortgage $3000 and the breakeven becomes 20 months. A homeowner refinancing their mortgage stands to benefit in such a loan scenario.
Had they listened to norm of a standard 1% savings in interest rate they would have foregone the benefits of $150 per month as well as the interest savings over the life of the loan. Moreover, waiting for rates to drop is another risky proposition to hit the 1% mark. Granted mortgage rates have been quite favorable lately, they can go up at any time. Put another way, waiting for the absolute lowest interest rate the market will bear is it really an impossibility unless you’re willing to pay upfront overhead in the form of discount points. Most homeowners want to keep their costs at a minimum in exchange for a lower rate of interest and subsequent lower mortgage payment.
Sonoma County Home Loan Refinance: The “How To” Component
Refinancing is always beneficial so long as the borrower can save money. How to actually refinance that mortgage is something else entirely. Current homeowners will want to do the following:
1. Always consider refinancing despite the difference in rate-if it makes sense do it. This applies to primary residences, second homes and investment properties.
2. Determine if your loan is owned by Fannie Mae or Freddie Mac. If your loan is, you’ll might be eligible to qualify for the Making Homes Affordable Program, sometimes dubbed the Obama Refinance or the Under Water Refinance Program. Determine your eligibility by either of these links. https://ww3.freddiemac.com/corporate/ and http://www.fanniemae.com/loanlookup/. Your loan can only be owned by one of the two entities.
3. Do a financial checkup. Do you know what your credit score is? Do you carry significant revolving debt? How much of your income goes towards monthly debt obligations? Here’s a simple mathematical home loan refinancing formula: take your total house payment including taxes and insurance, add to that figure, any minimum monthly payments on any debt obligation that shows up on your credit report (includes car loans, credit cards, personal loans, lines of credit etc.) divide that figure into your gross monthly income. If that percentage % is more than 45%, securing a refinance would definitely be your best financial interest. If the number is less than 45%, refinancing still might benefit you, at that point talk to a local mortgage loan officer.
4. Gather up the documentation needed for getting a home loan. Quick package includes:
- most recent two years tax returns
- most recent two years W-2′s
- most recent pay stubs for the last 30 days
- two months most recent bank statements
- last two months or last two quarters of any retirement account/asset account
With that information, the mortgage lender can put together a loan application and pull credit and determine your loan eligibility right up front and hopefully qualify you for the best interest rates available in the market today.
Refinance your Sonoma County Home Loan, if you feel there is a net tangible benefit. The 1% refinancing rule no longer applies as benchmark 30 year mortgage rates are at historic lows. Learn if you can take advantage of the Making Homes Affordable Program, do a financial checkup and gather your financial documentation and get your mortgage loan application started. Get a complementary mortgage rate quote on a Sonoma County Home Loan Refinance today!