The Loan Help Desk:Does it Make Sense to Refinance?

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Thom MacFarlaneMortgage Banker- Home Loan Broker

NMLS #282091 CA DRE #01210469

Email: thom@sibloans.comOffice: 858-485-0462Fax: 866-408-1408

www.homeloanwisdom.comwww.thommacfarlane.com

Poster ID on SDCIA:

Is it true that the interest rate needs to be 1% or lower than my current rate in order to make sense to refinance?

Not true in California where housing costs and mortgage loans are higher than other parts of the country. In California, loan costs are lower than in other parts of the country because we use escrow and title companies for the fiduciary responsibilities as opposed to expensive attorneys. Couple the saved expenses, the relationship of loan costs to the higher loan amounts in California, and the advent of several loan options to choose from and it can sometimes make sense to refinance with only a .25 to .50% decrease in your interest rate.

Typically I will give a borrower 4 Loan Options to choose from:

No Cost Loan – Lender contractually agrees to all hard costs in exchange for a higher then market interest rate. Because many loan’s hard costs are fixed regardless of the loan size, this option is generally most rewarding to loan requests of $250,000 or more.

No Point Loan - The borrower accepts a higher rate of interest in exchange for not paying the “discount” points. Borrower is only paying the hard costs of title, escrow, recording, appraisal fee, credit report, processing and other third party fees.

Low Rate/High Fee (Points) – Essentially you are paying the lender points, a percentage of the loan amount, to “discount” your interest rate. The greater the points (fees) you pay, the lower the interest rate. This option allows you to buy the best rate. (shown as 1/2 pts in the example)

Low Rate/High Fee (Points) – Essentially you are paying the lender points, a percentage of the loan amount, to “discount” your interest rate. The greater the points (fees) you pay, the lower the interest rate. This option allows you to buy the best rate. (shown as 1.25 pts in the example)

Loan Option No Cost No Point Low Point 1 Point DiscountLoan Amount $300000 $300000 $300000 $300000Interest Rate 4.25% 4.125% 4.00% 3.875%Discount Points 1.25 rebate none 1/2 point 1.25 pointsLoan Term - Years 30 30 30 30Principal & Interest Payment $1475.82 $1453.95 $1432.25 $1410.71Pmt Difference vs. No Cost Option n/a $21.87 $43.57 $65.11Cost of Points or Rebate - $3750 -0- $1500 $3750Lender, Escrow & Other Fees $3750 $3750 $3750 $3750Total Costs -0- $3750 $5250 $7500

Sample of Four Loan Options as of 3/3/2015:$300,000 Loan; $400,000 Value = 75% LTV; Owner Occupied; 30 Year Fixed

I’m frequently an advocate of the “No Cost” but if intended length of ownership is long-term it may benefit you to pay some points to discount the rate.There may be some lender requirements in having established new credit and/or having limited derogatory since a negative event, but the bottom line is that a very large segment of the people who have experienced adversity through a short-sale, foreclosure or even a bankruptcy - can buy again!