Why Refinance Today?

The most common reason for refinancing today is to save money.  Saving money through refinancing can be achieved in several ways:

-By obtaining a lower interest rate to reduce mortgage monthly payment. Mortgage interest rates are low today, especially on fixed rate programs. It means you have a chance to improve your financial situation during crisis. For example, $400K loan amount 30-year term at 6.5% – monthly payment is $2,525.27; and at 5.5% – monthly payment is $2,271.16. To reduce your rate by 1%, you can save $257.11 per month. If you are planning to move or even pay off your loan within the next few years, refinancing probably makes little sense because you won’t be paying monthly bills long enough for the savings to cover the up-front closing costs. “Generally, if you can earn the costs back within two to three years, and it’s a home you’re prepared to stay in for much longer than that, it’s usually a good thing,” wrote by Greg McBride, economist at Bankrate.com.  A payback period (mo.) = closing costs divided by monthly savings.

-By reducing the term of the loan to save money over the life of the loan. For example, refinancing from a 30-year loan to a 15-year loan might result in higher monthly payments, but the total interest paid during the life of the loan can be reduced significantly.

-By increasing the term of the loan from 15-year to 30-year term, if you need additional money in your pocket to pay bills. For example, $400K loan amount 15-year term at 5.5% – $3,268.33 monthly payment; 30-year term at 5.5 – $2,271.16 monthly payment. You can have additional $997.17 per month in your pocket.

-People also refinance to convert their adjustable loan to a fixed loan. The main reason here is to obtain the stability and the security of a fixed loan at a lower interest rate. “If you plan to stay in your home for years, and you are currently in an adjustable-rate mortgage, you should strongly consider a refi. ARMs are incredibly dangerous — the financial equivalent of Russian roulette, but with multiple bullets. Refinancing into a 30-year fixed-rate loan may not cut your current monthly payments by much, but it gets rid of the risk that those payments will suddenly skyrocket.” – wrote by The Wall Street Journal.

-Another reason why homeowners refinance is to consolidate debts (cash-out refinance) and replace high-interest loans with a low-rate mortgage. The loans being consolidated may include credit cards, student loans, auto loans, second mortgages, etc. In many cases, debt consolidation results in tax savings, since consumers loans are not tax deductible, while a mortgage loan is tax deductible. We still have banks that allow cash-out RIFI for high Loan-to-Value (LTV) mortgages up to 90% without PMI and cash-out adjustment to par rate.

Read Closing Costs vs. No Closing Costs and What Fees are Included in Closing Costs? Can You Avoid Them?

Fixed Rate vs. Adjustable Rate

Mortgage Programs:

-Fixed Rate Mortgage Programs (40, 30, 20, 15, 10 years) – The interest rate and your mortgage monthly payments remain fixed for the period of the loan. The shorter the term of a loan, the payment is higher because the principal amount of debt is amortized over the shorter period of time. The payments on fixed rate fully amortizing loans are calculated so that at the end of the term the mortgage loan is paid in full. During the early amortization period, a large percentage of the monthly payment is used for paying the interest. As the loan is paid down, more of the monthly payment is applied to principal. If you are going to keep your property more than 5-7 years, you should consider getting fixed rate program. You will be protected if rates go up, and can refinance your mortgage if rates go down. Usually, fixed programs have an interest rate higher than adjustable rate programs. The higher rate, the higher monthly payment. If you are planning to stay in your property less than 5-7 years, you should consider adjustable programs. But on December, 2008 fixed rates are lower than adjustable rates. We can not explain this phenomenon.
–Adjustable Rate Mortgage Programs (ARM) – Frequencies of payment/rate adjustments dictate how often the rate can change. How the interest rate can change is a function of the index added to the margin. The index of an ARM is the basis of future interest rate changes.  The Index is regularly published in a source accessible to the public. The margin is set by the lender and is the amount above the index that the interest rate can adjust at the time of adjustment. The result of the index plus margin formula is the new interest rate. Rates and payments may go down if rates improve, but it is more risky because it is potential for high payments if rates go up. This program can be good for a short period of time. The better choice will be combined mortgage programs.
–Combined Mortgage Programs (3/1 ARM, 5/1 ARM, 7/1 ARM, 10/1 ARM) – A combination of fixed and ARM loans with 30-year amortization period. With such type of loans homeowners can enjoy from three to ten years of fixed payments before the initial interest rate change. At the end of the fixed period, the interest rate will adjust annually. The advantage of these loans is that the interest rate is usually lower than for a 30-year fixed (the lender is not locked in for as long so their risk is lower and they can charge less) but you still get the advantage of a fixed rate for a period of time.
-Fixed (30 years) or Combined Programs with Interest Only Option (I/O) – A loan that doesn’t require a set payment each month up to 15 years. You get two payment options to choose from each month: your lender sends you a monthly statement offering an interest-only payment (1) and 30-year amortized payment – principal and interest (2). If you are going to pay off your mortgage during 10 years making large prepayment of principal, your actual rate can be decreased from 6-7% to 2-3% by using this program. For our customers we make special plan with math calculations how to save money with I/O 30-year amortized program instead of 10-year amortized fixed program. 
–First Position Home Equity Line of Credit (HELOC) – When you don’t have the 1st mortgage, you can obtain Equity Line up to 75% of the property value and up to $350K limit amount. Current HELOC rate is lower than the 1st mortgage rates and it is based on the prime rate that is 3.25% on today’s market. HELOC rate is always adjustable. With HELOC you can enjoy interest-only payments.

Availability of specific programs, Loan-To-Value ratios, Interest Rate depend on middle FICO credit score, type of documentation provided, type of occupancy, type of financed property and type of transaction.

Property Types:
SFR, 2-4 Family Houses
Condominiums, PUDs, Cooperatives

Credit:
From Excellent to Problematic
FICO Credit Scores from 620+

Documentation Type:
Full Income Full Assets (full docs)
Stated Income Full Assets
Stated Income Stated Assets

Occupancy:
Owner Occupied Properties
Second Homes
Investment Properties

Transactions:
Purchase
Rate & Term Refinance
Cash Out Refinance

Mortgage Structure:
First Mortgage Only
First & Second Mortgage
First Mortgage & HELOC
Second Mortgage Only
HELOC Only