Should you believe the headlines that scream "Refinance Now"?

Maybe. 

As a Certified Mortgage Planning Specialist™, I'm trained to see a mortgage within the overall context of your financial goals. 

Sometimes that means you should NOT let me help you find a new mortgage. 

In this newsletter I'll give you food for thought on the question of refinancing.  As always, I stand ready to consult with you on your individual circumstances.

--Tom

It is 1970’s era thinking that interest rates must drop by 2% + to justify the cost of refinancing.

First problem with that: If you are currently at 6% waiting for a 2% drop in rates, you are unlikely to see 4%.

Second problem: In 1978 the price of home was about $38,000 which meant $2000 in closing costs took a while to recoup.

With the average home now closer to $200,000 the dollar savings on smaller interest drops is bigger. Yes, 2% is nice, but not a universal number.

What if you can save $150-200 each month for 30 years? That certainly adds up.

Skip the temptation to make decisions based on rules of thumb. Watch this video. Run the numbers. I can help.
 

Let's say in 2004 you contracted  7-year ARM (7/1).  If you stick to Myth Two and wait until 2011, who knows where rates will be?  The opportunity to lock into a fixed at 5-5.5% is NOW.

On the other hand if your 2004 ARM adjusts this summer at 5.5%, it's time to shop -- a no brainer for you.

Watch this video or call me.  Together, we'll run the numbers based on today's value of your home and today's mortgage products.

PMI is not universally "bad." I've refinanced people into contracts that required PMI because the mortgage made overall sense for their financial circumstances.

In the not-so-recent past, when home values were appreciating quickly, people counted on rising equity to quickly eliminate the need for private mortgage insurance.  They avoided PMI with a second mortgage or a fixed-rate equity line.

In today’s marketplace, most homes haven’t appreciated much. Seconds and equity lines are tougher to acquire now.  People are suddenly uncomfortable with the thought that rates will adjust.

Take heart. PMI companies have creatively structured products to reduce risk to lenders and make the cost more tolerable for homeowners.

Instead of focusing on PMI, you really need to look at what how much it will cost to own this house over the timeframe you're going to be on it. 

How? 

• Add up all closing costs, interest and PMI (the three financing costs) over the remaining time you expect to stay in the house
• Compare to existing costs of your current mortgage/other options
• If you spend less over time in a contract that includes PMI, take it

For example, let's say you plan to live in the house another eight years. If you save $30,000 including PMI and interest and costs  and spend $5,000 in closing costs that’s a net gain of $25,000 over eight years. You will have saved $2000 a year, and that's the bottom line. 

For more information watch this video.

The total cost to you matters more than the interest rate and more than whether your contract requires PMI. 

When refinancing, I advise clients to think of either moving their monthly payment savings into a different asset class or reducing liabilities.

Assets include a money market, a retirement account, a college savings account and cash value in a life insurance policy. These need to grow.

Liabilities like student loans, credit cards and auto loans, must go. 

Your home is just one item on your balance sheet -- although a very important one. It's time to think of our homes in this way.

As a Certified Mortgage Planning Specialist™ it's my job to recommend products that improve your balance sheet and cash flow position.

If you're considering refinancing let's look at what to do with mortgage payment savings when we talk.