Springfield News-Sun
By Jill Kelley
Sunday, February 7, 2010
Charles and Nancy Henson of Centerville refinanced their home mortgage last year, and Charles Henson said it was not a difficult decision.
“The rates had dropped, and we wanted to do something a little more secure,” he said.
“Our previous rate was 5.625 (percent). When the rates for a 30-year fixed mortgage dropped below 5 percent, I thought we should go for it. We ended up locking it in at 4.875 (percent).”
Low mortgage rates have made news in these recessionary times, spurring many to consider the cost benefits of refinancing their homes.
Refinancing is basically replacing one loan with another, but, depending on the new loan’s terms, it can save you tens of thousands of dollars in the long run.
If you are wondering whether this move could be a good deal for you and your family, here are some tips from a couple local experts to help guide your decision.
Factors to consider
Every refinance is unique, due to the many factors involved in each case: your loan, your credit, your home’s equity, the interest rate, the costs of the refinance, etc.
Here are some things to consider:
Interest rate. “If you can save half a point or more on your interest rate, that can be a good indicator to refinance,” said Kay Sandusky, senior vice president of the Citizens National Bank of Southwestern Ohio.
Sandusky said on Wednesday, Feb. 3, the rates at Citizens National were 4.625 percent for a 15-year loan and 5.25 percent for a 30-year fixed loan.
At Union Savings Bank, the rates were 4.5 for a 15-year loan and 5.25 for a 30-year loan.
The rates change daily.
Total cost benefit. Kim Penner, inside sales manager at Union Savings Bank, said you have to consider your total costs when considering refinancing.
“Your lowest interest rate alone is not always your best deal,” Penner said. “You’ve got to look at your total costs. You have to see if it makes sense to get a lower rate if your costs are high.”
Sandusky added: “If it is going to cost you $2,000 to do the refinance and you are saving $200 per month, do the math and consider how long you will be in the home and if that is a savings to you.”
Evaluate how much time you plan to be in your home. “How long you’re going to be in the home is a big factor,” Penner said. “If someone is going to live in the house three to five years, (refinancing) may not be a great idea.”
Short term vs. long term. “Think about what term of loan you want,” Penner said. “What are your concerns? Is cash flow an issue? Are you looking at retiring?”
He added that the sooner you pay off a loan, the more interest you save.
“The difference in interest could be $40,000, $50,000, $60,000,” Penner said.
“If somebody’s going to be living in the home for a while, that makes sense. The payment is higher with a shorter-term (loan), but it gets paid off more quickly.”
Henson is retired and his wife is self-employed, but he said they decided to go with a 30-year rate because it was a more conservative approach given the economic climate.
“We looked at 30 and looked at 15, but decided we could make a 30-year into a 15 by paying more on the principal each year,” Henson said. “With a 30-year rate, you have the flexibility if you want to pay extra.”
Know your credit score. Sandusky brought up the fact that credit score guidelines have been raised. Borrowers that have at least a 740 get the best terms.
“You really need a minimum score of 680,” she said. “If your credit score is lower, you can still get a loan, just at a higher interest rate.”
Know your home’s equity. “You have to have 20 percent equity in your home for a conventional loan without private mortgage insurance,” Sandusky said. “There are other options available, however.”
Talk to a professional. This is the best advice of all. Since your financial situation is your own, knowing exactly what your specific options, costs and savings could be are key to your decision.
“I ask a lot of questions about the borrower and offer them options,” Penner said.
Sandusky added that a bank is not allowed to charge a fee for merely discussing a client’s options.
“The only fee they are allowed to collect up-front is the cost of a credit report,” Sandusky said.
“And, if (customers) disclose their debt to me, I can give them an assessment for free.”
She added that for $30, homeowners should be able to get a full disclosure of the fees and costs, benefits and annual percentage rate of their refinance.
Another tip Sandusky offered was, if you shop around for assessments, don’t have the banks run your credit report each time.
“Multiple inquiries on your credit report in a short period of time is harmful to your credit,” she said. “Know your credit and tell the bank.”
Check it out this year. Although some economic forecasters are predicting interest rates will go up soon, both of our local experts thought they wouldn’t go up drastically before the end of the year.
“Every estimation we hear is maybe by the end of year,” Sandusky said. “It’s just supply and demand.”
Penner said inflation is coming, but he doesn’t think it will get here soon.
“The economy right now is just crummy,” he said. “People just don’t have much trust in it, and that will probably keep rates down. But, for how long is anyone’s guess.”
Henson said he is happy with his decision and would recommend refinancing to others.
“It’s all relative to what your current rate is, but if you are sitting there at 6 percent, you ought to be refinancing.”
