Is Now
the Time to Refinance?
--Bills.com suggests pros,
cons of refinancing in today's bumpy market --
SAN MATEO, Calif.,
Oct. 18, 2006 – Home mortgage rates are up half
a percent from one year ago, but down half a percent
from March -- and while this latest rate decrease has
led to a surge of home refinancing activity, Andrew
Housser, co-CEO of Bills.com, suggests homeowners consider
the pros and cons of refinancing in their situation
before they sign up for a new deal on their home loan.
"Some homeowners
are sitting on adjustable rate mortgages (ARMs) wondering
if now is the time to refinance to a fixed-rate loan.
They worry -- and rightly so -- about payments increasing,
especially in an atmosphere where home values might
decline," Housser said. "Other homeowners
want to use cash from their equity to pay for kids’
college tuition, take advantage of lower prices to put
a down payment on a second home, or remodel existing
homes."
Predicting mortgage
rates involves researching a complex set of variables,
explained Housser, including companies that buy and
sell mortgage loans, the status of inflation, financial
markets, and the state of U.S. currency.
In light of the confusing
market, Housser's company, Bill.com, suggests the following
tips to help homeowners decide if they would be wiser
to refinance now or keep their current mortgage.
Pros: Refinance
now if …
1. ARM rates are rising
above market rates. As interest rates increase,
ARM loan payments do, too. Homeowners concerned about
payments, and whose rate is higher than current fixed
mortgage interest rates, might consider refinancing.
"Many economists forecast basically stable interest
rates through Thanksgiving or so, but with the amount
of uncertainty in financial markets, there's no telling,"
Housser said. "You can begin the process with
a mortgage lender and have him or her watch rates
for you to establish a good time to lock your loan."
2. Refinancing is affordable.
Refinancing involves expenses that can total around
2 percent of the total loan amount. Typically, financial
advisors suggest refinancing is worthwhile if the
savings on payments will pay for the refinancing costs
within two years. Homeowners can calculate their own
"break-even" date by dividing the up-front
cost (the figure on the Good Faith Estimate form)
by the anticipated monthly savings. The answer is
the number of months it will take to pay off the refinance
-- and sooner is better.
3. You've grown roots.
Homeowners who plan to stay in their homes for a long
period of time might find that refinancing makes sense.
"If you have a long term left on your mortgage
payments, and your rate is higher than market rates
-- or you have an ARM or balloon-payment loan and
want the security of a fixed rate -- you'll likely
meet the "break-even" criteria outlined
above," Housser said.
4. One loan is better than
two. For homeowners with a first mortgage
as well as a second mortgage with a high rate, refinancing
can combine the two loans into one. Second mortgages
usually have adjustable rates. If the second mortgage
has a hefty balance, today's borrowers might be better
off rolling the two loans into one. Compare current
loans with refinancing options with an online calculator
such as the one at http://www.bills.com/homerefinance/.
Cons: Wait to refinance if …
1. Credit isn't stellar.
Those who have made credit mistakes (such as late
payments, especially on the mortgage) will benefit
from spending a few months cleaning up their act before
applying for a refinance. Paying on time and reducing
or eliminating credit card balances will earn a better
refinanced mortgage rate.
2. Life is in flux. Homeowners
should not invest in refinancing if they might sell
the home within a year or two. "Divorce, job
relocation, or even a big raise might make you rethink
your residence," Housser noted. "Refinance
when your life is more stable."
3. The clock is ticking
on private mortgage insurance (PMI) payments.
Most lenders require PMI for borrowers whose mortgage
balance is greater than 80 percent of the price of
their home. When the loan value falls below 80 percent
of the home’s value, borrowers may be able to
request elimination of PMI. Some loans may even require
borrowers to refinance to eliminate PMI.
Removing PMI will give most borrowers an immediate
monthly payment reduction of $100 to $200 (the mortgage
statement lists the specific payment). "You may
decide to hold off on refinancing if you see falling
below the 80 percent loan-to-value mark soon,"
Housser explained. "In this case, waiting a few
months to refinance could mean significant savings
by eliminating your monthly PMI payments."
Housser pointed out that refinancing can be a good
way to get a better mortgage, "but it isn't the
be-all and end-all for every borrower. Take time to
educate yourself and weigh the pros and cons of your
situation before making a decision."
Based in San Mateo, Calif., Bills.com is a free one-stop
online portal where consumers can educate themselves
about complex personal finance issues and save money
by choosing the best-value products and services.
Since 2002, Bills.com’s partner company, Freedom
Financial Network, has provided consumer debt resolution
services, serving more than 10,000 customers nationwide
and managing more than $250 million in consumer debt.
The company’s co-founders and CEOs, Andrew Housser
and Brad Stroh, were recently named Northern California
finalists in Ernst & Young’s 2006 Entrepreneur
of the Year Awards.
### |
