Refinance Your Mortgage for Rate and Payment Reductions

The primary reason homeowners refinance their mortgage is to obtain a lower interest rate and lower monthly payments. By refinancing, the borrower pays off their existing mortgage in favor of a mortgage with a lower interest rate or longer repayment terms. This can often be accomplished with a no-points no-fees loan program, which essentially means at “no cost” to the borrower.

In the no-points no-fees scenario, the mortgage consultant uses rebate monies paid by the secondary market to pay the non-recurring closing costs for the borrower. These are one time fees such as title insurance, document preparation, tax service, flood certification, processing and underwriting, etc. The borrower is still responsible for recurring fees such as insurance and property tax escrow payments.

Refinancing typically occurs when mortgage interest rates drop significantly, but borrowers with recently improved credit scores are often candidates for better interest rates as well. If you haven’t checked your credit score in a while, it’s a good time to call a mortgage consultant to obtain your credit scores.

Another primary motivator for refinancing occurs when a borrower has an adjustable rate mortgage that is near the end of the fixed rate period. We presently are providing financing in an environment were short term rates (adjustable rates) and long term rates (fixed rates) are essentially the same, as a result of an economic phenomenon called the inverted yield curve when measuring the indexes that determine these rates. As a result, borrowers who are scheduled for a future rate adjustment will want to explore refinancing to avoid significantly higher monthly payments as rates continue to rise.

We have many clients who have chosen to refinance in order to pay their mortgage off in a shorter period of time. There are two primary methods used to accomplish this goal and we work hand-in-hand with the borrower to determine what type of mortgage best addresses the goals and objectives of the borrower and if the present mortgage is the best solution.

One approach is to structure a mortgage that allows the borrower to save the greatest amount of interest over time and pre-pay the mortgage by a significant number of years. If refinancing results in a lower monthly payment, the borrower can still continue making the monthly payment amount made on the original mortgage, and the extra money will be applied to the principal balance.

Another approach has been promoted by best-selling author and investment guru Douglas Andrew’s philosophies in the book “Missed Fortune,” which suggest investing the monthly payment savings in an interest bearing account that could earn a better rate of return and grow to the amount of the mortgage in even less time. This method provides excellent liquidity, but having more direct access to this money may be too tempting for some homeowners.

Regardless of the reason for the refinance, the mortgage consultant will need to know what the existing loan scenario entails, review the homeowner’s long-term goals, and provide a comprehensive spreadsheet that compares and contrasts the various loan programs available.

It is important to note that refinancing to obtain a lower interest payment could also result in a lower deduction at tax time. The mortgage consultant and accountant should work hand-in-hand to ensure that the homeowners’ objectives are being met.