Refinancing your mortgage is an excellent way to save money, get access to cash and to increase your cash flow.  Next time you are in the market for a home refinance, we recommend taking a few moments to evaluate the proposed refinance loans from several perspectives. It is wise to consider several refinancing options and really do the math before committing to another home loan for thirty years.

1.    How much will mortgage refinancing cost you?

When you first begin the home refinancing process, we recommend that you get quotes from a few credible mortgage lenders.  When you get the Good faith Estimate from the lenders you need to do a thorough, side by side analysis. Compare the refinance rates, closing costs, types of interest and the terms of the refinance loan.  Make sure you are comparing apples to apples. You will want to compare the total costs for refinancing including title insurance, escrow, appraisals, origination, notary, underwriting, processing, etc. Negotiate with the loan companies and see who is going to reduce and eliminate lender fees without raising the fixed mortgage refinance rates.  Compare the total cost with interest of a no cost mortgage loan and a loan that has lender fees.

2. How much are you really saving with a refinance loan today?

Unfortunately homeowners often just assume that getting a refinance mortgage will automatically save them money. Ok, your monthly mortgage payment is reduced but how many more years will you be paying this new mortgage?  A simple solution is to take your current monthly payment and multiply that by the number of months you have left on the loan. Then you multiply the new mortgage refinance payment by the number of months in the term. (ie. 30-years would be 360, 15-years would be 180, etc.) If your current mortgage payments equate to a less when you multiply the term, then you know this refinance loan you are considering is not actually saving you money in the long run.  If you recently purchased the home and you don’t plan on staying there for very long, then lowering the monthly payment and increasing your cash flow may meet your needs and accomplish your goals for the best mortgage refinancing.  Another factor to consider is mortgage insurance. Sometimes homeowners will refinance into a new loan that has monthly mortgage insurance. It is imperative that you add the monthly insurance payment to the new monthly payment for the refinance loan if you want to do a fair, side by side analysis. Recently I have seen borrowers who are so happy to be able to refinance and lower their mortgage an entire percentage point (ie. From 5.75% to 4.75%), but when the borrowers factors in the monthly insurance to the refinance payment the suddenly the monthly savings vanished.  FHA has raised the monthly insurance premiums several times in the last few years, so sadly in some cases borrowers are not saving money when refinancing with FHA.

3. Are there risks with increasing a mortgage balance if you are saving money?

There are times when consolidating debt and 2nd mortgages make sense financially.  However, when you increase your mortgage balance you often lose future leverage because by decreasing your home’s equity you potentially could be hindering your ability to refinance in the near future.  When housing markets are robust and property values go up in value annually it’s easy to lose sight of potential pitfalls because at the time the risks may appear minimal.

Let’s consider a borrower who bought their home in 2003 for $300,000 at 6.25% and in 2006 his home is appraised for $400,000 and he or she decides to finance some home improvements and consolidate a few credit cards, so they take out a tax deductible home equity mortgage, because they are happy with their existing rate on their first mortgage. At this point the borrowers appear to be making wise decisions financially and taking advantage of homeownership. In 2008 interest rates fall to record lows and these borrowers decide they want to refinance a first and second loan together for a lower monthly payment with a fixed rate.  The borrowers are excited because refinancing $375,000 at 4.875% would save them thousands of dollars a year. When these borrowers get their house appraised for the refinance they learn their home value has declined from $400,000 to $310,000 and their loan application is rejected from the lender because their mortgage is underwater.  Does this situation sound familiar?  According to Core Logic currently nearly 11 million homeowners are strapped with an underwater mortgage. In this case, these borrowers had great credit and solid income but because of the lack of home equity they were unable to qualify for refinancing because of the depreciated home value. When refinance rates fall to record lows it may look like the best time to refinance, but there are factors involved in home financing that are beyond the borrower’s control.  Things like property value, there is very little a homeowner can do to impact when the real estate market is on a downward trend.  Don’t misunderstand me though, in most cases, consolidating revolving debts by refinancing it into a tax deductible simple interest mortgage is a wise move. However if you are going to leverage your mortgage to the value of your home make sure that you are committed to the mortgage for the long term.