Have a Happy & Healthy New Year! - the Parklander

REAL ESTATE
WHY SHOULD I REFINANCE?
THE MORTGAGE EXPERT
There are many reasons to consider a mortgage refinancing.
In today’s American culture, many reasons given may be inappropriate;
some reasons are useful and cannot be dismissed.
In general, refinancing a mortgage is done to accomplish one or more
generic goals. These include: improve the interest rate vs. one’s old
mortgage, shorten the term of the loan – years to go until the loan is paid
off – or “cash out” some of the equity – the excess of the property market
value that has built up over the years since the property was purchased,
over the remaining mortgage debt. Any one of these reasons may be
considered if the numbers indicate an economic advantage to do so.
In truth, refinancing for rate usually means a change in term.
Therefore, such a transaction is widely known as a “rate and term”
refinance. Rate and term can be combined with a “cash out” transaction,
so long as there is enough equity in the property to permit the lending of
additional money. And, since a refinance is a new loan, you will have to
qualify again.
Here’s an example: In 1990 Jon and Alice purchased a new home
for $100,000; gave a down payment of $20,000 and gave an $80,000
mortgage to the bank for 30-years.
114 JANUARY 2007
At that time, they qualified for an interest rate of 8.75%.
Their mortgage payment worked out to $629.36 per month for 360
months – principal and interest – also known as P&I.
Now, in 2006, they find that their home is now worth $350,000 and
that the remaining balance on the old mortgage is only $64,920.
Subtracting the balance on the mortgage of $64,920
from the current house value of $350,000, they are now delighted to
realize that their original $20,000 equity has grown to $285,080!
Jon and Alice speak to their mortgage broker and discover that they can
refinance the remaining balance now at 5.875% and reduce their payment
to $360 per month.
They are excited with the improvement, but also discover that the
amortization period - the number of years it will take to pay off the new
loan – gets reset to 30 years. A little concerned, they call the mortgage
broker again and find out that by doing the refinance anyway, they will
save $58,431 in interest over the next 30 years compared to the remaining
interest that will be owed over the remaining term of the old loan.
“Now that is better,” agrees Alice!
Refinancing can be very helpful. Because a mortgage loan is a
long-term obligation, common sense suggests that it should be used for a
long-term purpose. Like buying a home.
Jon and Alice have been fortunate and their equity has grown
dramatically over the years. They can now borrow some of their equity for
a suitable reason. Like a remodeling or building a swimming pool.
They decide that as long as they are refinancing for rate and term, this is a
good opportunity to borrow some of their equity to cover the expense of
such a project – a cash-out loan.
A word of caution: In most cases, the bank will not ask why you are
borrowing the money in a “cash out” loan. The bank already has the
collateral they need, a lien on your home. So, you must rely upon your own
good sense to act in your own best interest.