Refinancing mortgage now makes sense for many

Question: Why would someone refinance a home loan?

Answer: There are a number of reasons why people refinance. Many times borrowers refinance so that they can get a lower interest rate and payment on their mortgage; other times borrowers want to get a larger new loan so that they can get extra cash out from the equity in their home to pay off other debts or to use for something like home construction.

Q: When is a good time to refinance?

A: It’s definitely a good time to refinance when interests rates are far enough below the rate you are paying on your current loan to (1) cover all your closing costs, (2) do that without any increase in the principal you owe or length of your loan; and (3) lower your monthly payments. Since rates are currently near historical lows, lenders are providing enough credit to pay for all closing costs at very low rates. A lot of people have been taking advantage of this opportunity to refinance into a lower rate and payment without spending any money or having their loan amount go up.

Q: If the lender covers all the closing costs, how does the lender make money?

A: The lender is willing to cover your closing costs if you are willing to pay an interest rate that’s attractive to the lender. Recently lenders have been willing to offer enough credit to cover closing costs (appraisal, title, underwriting fee, etc.) on VA loans if the borrower agrees to a 3.25 percent interest rate, APR 3.326 percent. If the borrower wants the lowest rate currently available, about 2.75 percent, APR 2.943 percent, then the borrower has to pay the closing costs.

Q: Do all lenders offer this option?

A: Each lender is different and has different rates depending on the loan type and borrower, so it’s best to shop around to find the lender that can offer the best rates and program for you.

Q: You are a mortgage broker. Does the borrower have to pay a fee for your service?

A: No. The broker is paid by the lender for bringing the customer to the lender.

Q: If I refinance a 30-year loan that I have already paid for five years, will the clock reset to 30 years on my new loan?

A: You can do a 25-year loan for your current principal and have lower payments if the interest rate is far enough below the rate you are paying now.

Q: How do I calculate whether current rates are low enough that I can cover all the loan costs without increasing my mortgage amount or adding time to my loan?

A: As rates stand currently, for most qualified borrowers, if you’re in a conventional loan with an interest rate above 3.75 percent or a VA loan with a rate above 3.25 percent, then rates are low enough for you to benefit from a refi.

Q: When I hear about a loan with no closing costs, doesn’t that mean the closing costs are added to the total loan and I have to pay them over time?

A: This is a common assumption, but no. It means that the costs of the loan are paid by the lender credit. The costs are not paid out of your pocket or over time by an increased loan amount. The lender is willing to pay those costs to get the loan.

Q: Can you give me an example of average savings?

A: The amount of savings can vary greatly, but a VA homeowner with $500,000 left on their mortgage from 2014 who goes from 3.75 percent to a 3.25 percent, APR 3.326 percent, would lower their payment by over $200 per month. If borrowers are comfortable with their current payment and wanted to keep paying the same amount toward the new loan, this refinance would cut more than two years off their loan, and they would save over $70,000. That’s $70,000 more that they would have saved for their retirement.

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