Home Refinancing’s Lesser Known Features and Benefits

By Ryan Dosen

 

If you’re a homeowner, now could be a good time to explore your refinancing options.

This column has given a great deal of attention to the fact that we are still enjoying historically low interest rates that will not last forever (and probably not much longer). This is all great news if you are in the market to buy a home. You’re going to have the chance to lock in these amazing rates and enjoy the ride for the long haul. Whether you plan to stay in your current home or you’re looking to leave within the next year, there are ways to maximize savings by taking advantage of low rates—and more reasons to do so than you might have even considered.

 

Median Household Would Save Big by Refinancing

The National Bureau of Economic Research (NBER) recently studied a large, random sample of outstanding mortgages from December 2010 and discovered that the median household could save $160 per month over the remaining life of their loan by refinancing, amounting to a total savings of around $11,500. NBER says that their “results suggest the presence of information barriers regarding the potential benefits and costs of refinancing.” The Bureau called for “expanding and developing partnerships with certified housing counseling agencies to offer more targeted and in-depth workshops and counseling surrounding the refinancing decision…to alleviate these barriers .”

 

Our Expert’s Take on Refinancing

To do our part in breaking down the educational barriers related to refinancing, I spoke with Joe Gonzalez, a local mortgage expert with Gateway Funding in Plymouth Meeting, PA.  Joe said that one important thing to remember about refinancing is that, unlike your home purchase, you’re probably not going to be bringing any money to a refinancing closing. You also should be leaving the table with a lower monthly payment, a shorter loan term, or a decent-sized check. You should be refinancing only to improve your present situation, and you should therefore consider having an open discussion with an experienced mortgage professional about the possibilities for what refinancing can do for you.

In addition to the possibilities of obtaining “no closing cost” refinancing to simply shave your monthly payment, there are other possible benefits to refinancing. You could take advantage of today’s lower rates to shorten the term of your loan. Joe had a recent client decide to refinance and keep the same monthly payment, instead choosing to shorten the term of the loan. The client had 23 years remaining on the original loan. But with today’s lower rates, Joe was able to structure a refinance where the client was able to pay off bigger chunks every month and shorten the life of the loan to 20 years.

Joe also said that for households that are planning on selling their homes in the near future, there are some amazing adjustable rate programs available that are helping his clients take full advantage of today’s rates. If you’re going to be selling in the next 5 years, you can be better off not settling for a relatively permanent 30-year mortgage (and its higher rates).

 

Other Benefits of Refinancing

There are other benefits or breaks you can also enjoy when refinancing. Joe reminded me that when you refinance, your first payment is usually due on the first of the month after next. For instance, if you refinanced on September 20, your first payment likely wouldn’t be due until November 1.  You’re not completely avoiding the interest, but because mortgage payments are for the previous month’s interest, you are essentially getting a one month break from making a mortgage payment.

Joe also said that tax escrows (money collected monthly by the lender along with your principal and interest payments to satisfy yearly property tax bills) from the first loan are usually returned to you within two weeks of refinancing. Depending upon the time of year of the refinance, you could wind up receiving a check for several thousand dollars in tax escrows shortly after closing.

Again, by refinancing you’re not completely avoiding real estate taxes or mortgage interest.  However, because of  the way loans and refinances are structured, you could find yourself receiving a nice check and a much-appreciated one month hiatus from your monthly mortgage payments.

 

No Harm in Asking

There really is no harm in seeking out a reputable mortgage professional for a consultation about whether refinancing could be a good move for your household. Worst case, you do nothing, you “lose” 30 minutes of your time, and now the mystery is gone. Best case, you could wind up with a few thousand dollars in your pocket, no mortgage to pay next month, and either a lower payment going forward or a few years less on the term. All things considered, that’s probably a pretty decent investment of a half an hour.

 

— Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester. Contact Ryan Dosen for buyer or seller representation or for more perspective on the local and national real estate market by emailing rdosen@megillhomes.com or calling 610-399-0338. Please also visit The Wayne Megill Team blog at www.PAHomesAndRealEstate.com.