Defining the Perfect Refinance

Yes, I know, it seems like the boy who cried wolf, as many have been waiting for interest rates to drop the minute they closed on their home with an above-7% rate. The reality is that inflation cycles, like the one we’re at the tail end of, historically take time to recover from and get the economy back on a sustainable track.

While we are optimistically hoping to see a slow lowering trend to rates, the reality is that rates do not move in a perfect line, and we will see windows of lower rates and higher rates as the economic engine continues to chug forward in the coming months. The ability for you to secure The Perfect Refinance during these hopeful but volatile times comes down to several different factors, and my purpose today is to give you the insider’s view from an industry veteran on how to achieve that perfect refinance.

Step 1. Know the Goal

This seems like an obvious statement, but I’ve seen many people mess this up and lose time and money by not having 100% goal clarity. Let’s first address how long you intend to continue living in the home – any plans to move up, sell, etc., could impact the value of a refinance.

Next let’s talk about needs, are you in a position to get a lower rate but also possibly remove mortgage insurance with higher value? That could impact the actual product and timing of your refinance. Are you scheming different investment decisions that your equity could re-diversify to or thinking about any home improvement projects? That can change the scope and terms of your refinance as well.

Every time you restructure a loan can cost you time and money, so it is in your best interest to really take a step back, anticipate your housing and financial goals for the next two to five years as best you can and work to accomplish as much good as you can. The Perfect Refinance encompasses all your major financial goals in one smooth transaction!

Step 2. Have a Guide

If you are waiting for the radio or broadcast television to tell you when the rates are low, it’s usually a few weeks late. If you are thinking you’re going to accomplish the most “big picture” good in your financial life by responding to the many spam mailers and telemarketer calls from your servicer and others, then you are also likely mistaken.

It’s a dirty little industry cash grab that many companies will spin up large call centers with barely experienced individuals with the goal of taking advantage of rate lowering cycles by just refinancing as many people they can get to say “yes” and sign their loan disclosures without actually doing any type of fiduciary consulting or big picture market analysis. These solicitations are all just about closing a sale and you will never talk to that salesperson again.

The alternative is finding a person who understands (1) your goals, (2) the rate market and is even possibly connected with your local real estate agent so they can ultimately understand (3) what a Perfect Refinance looks like for you by combining optimal timing and terms for both interest rate, market value and your goals. Having a guide that meets these criteria can help ensure you don’t miss opportunities. Even last year we saw market dip ever so slightly for about two weeks, only to then go up over .5 to .75% for the next several months!

Step 3. Know The Math And Be Realistic

There is a lot to unpack on this one, but let’s start with the basics. Many folks refinance primarily to save on their monthly payment. If you get a 1-800 number calling you, saying they can save you $200 a month, that sounds great. Days later when you are reviewing the documents you signed and catch that your quote includes $12,000 in closing costs, the math starts to look less attractive.

Though it’s not an exact calculation, taking that $12,000 and dividing it by $200 means that it would take that individual 60 months or five years to actually “break even” on that refinance. This means that after five years, that individual hasn’t actually saved $200 yet but has barely just justified the cost. The general industry rule of thumb is to be as close or under an 18-month recoup time on associated closing costs.

One quick tangent here is that most of the time you are going to need to roll in some taxes and insurance cost on your refinance to re-establish your escrow account and pay those costs in the future (assuming you have an escrow account). These are a wash and do not count in the break-even analysis since you will receive a refund from your current servicer on your current escrow and can turn around and pay those down on the new loan (or pocket that), but either way it’s not an actual refinance cost.

The takeaway on break-even is then being patient and knowing the deal so you can ideally secure the highest possible monthly payment savings with the lowest possible rate and lowest possible closing costs. Be aware that a “free refinance” just means a lender is absorbing or covering cost through other means – a “free refinance” is typically going to be a higher rate, which allows a lender to otherwise cover costs for you. Free is never free.

The math can also work the other direction. Let’s say you can secure $200 per month savings with only $1,200 in closing costs. That’s a break-even of only six months. Under most market conditions, expecting a bigger shift in rates to save substantially more than the initial quoted savings in just a six-month period of time is unlikely and let’s suppose it really takes another 12 months before the client could save $300 each month from the original payment.

If this individual refinances now, after 12 months their net savings is $1,200, they are not restricted from participating in another refinance and may, in fact, be then more patient to let rates dip even further. If this individual decided not to refinance and wait for a bigger dip, they’re losing out on that $1,200 in savings and all the while have then spent $200 per month more on their mortgage or $2,400 total out of pocket more than if they had refinanced, given that typical refinance closing costs are rolled into the mortgage and not out of pocket. Not to mention that given payment logistics, usually homeowners skip the next month payment after the refinance (or in some cases, two months!), so the actual budget and cash flow of the individual that refinanced is significantly positively impacted by taking action vs. blindly hoping for better.

It is very easy for human minds to think “we just saw rates drop .25% in one to two months, surely that’s exactly what will happen in the next one to two months, so we’ll then save even more!”

If you can predict the economy like that, you wouldn’t need a refinance as you’d be making big cash on Wall Street! I believe this point is especially important for homeowners to understand, as getting out of this inflation economy will be messy and slow and marked certainly with ups and downs. YES, there may be a better opportunity in three years from now with rates, but are there savings that will make mathematical sense in the next six to 12 months that can help you start to improve your financial future? Likely.

Know your goals. Have a guide. Do the math! FBN

By Chris Hallows

For additional information or to schedule an appointment visit ChrisHallows.Benchmark.us or call 928-707-8572. The Flagstaff location is 824 W Rte 66 Suite A-3.

Chris Hallows is the Branch Manager & Sr. Mortgage Advisor of Benchmark Mortgage Flagstaff.

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