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Time to Refinance?

Posted October 17, 2012 in Advice Column, Ankeny

Rates again are at historic lows with some fixed rates as low as 2.875 percent for a 30-year mortgage and 2.375 for 15-year fixed. So is it a good time to refinance?

There really is no clear cut answer to the question. It is different for everyone owning a home. There are, however, several questions that you need to ask yourself.

• How long do I plan to stay in my home?

• How much will it cost to refinance my mortgage versus how much money will I save on the monthly payment?

Once you have determined the monthly savings, how long will it take in terms of months to recoup the costs to refinance?

I have received calls from clients stating they were under the impression there needed to be a 1 percent reduction over their current interest rate before it is worth refinancing. That maybe is true for some people with lower loan balances, but for people with higher loan balances, a .50 percent reduction in the rate may provide a significant savings per month and be well worth the cost to refinance.

With all this in mind, what should be your next step? Contact a local bank that has a good reputation in mortgage lending. Ask them what loan programs they offer for your potential refinance and discuss the monthly savings. Once you feel comfortable with the mortgage originator, ask them to provide you with a good faith estimate that will disclose the costs that you will incur. Part of your discussion with your banker should be whether there are any origination fees and discount points that accompany the rate. Origination fees and discount points are used to lower your interest rate. Typically, a 1 percent origination fee lowers the interest rate anywhere from a .25%-.50 percent. Origination fees and discount points are prepaid finance charges and are tax deductible. Another discussion point should be whether you want to escrow your own taxes and insurance. This can affect your rate and/or the origination fee. You have the choice to escrow your own taxes and insurance if you have 20 percent equity in your home. Another item to discuss is whether you want to pay your refinance costs out of pocket, or roll all or a portion of the cost into the loan.

When it comes to getting a rate quote from your bank, there are several things that affect the quote. Credit score is a major factor along with documented equity in the house as determined by an independent appraisal. Also important are debt to income ratio, loan terms and length of the loan (30, 25, 20, 15 or 10 years are all available). Adjustable rates loans are also still an option fixing them for one year up to 10 years.

Once you have made application with a bank, are pre- approved and have determined the best loan program for you: here are some additional tips to consider.

•    Ask for “real time” rate notifications — rates recently hit record lows, but by the time it was reported in the news, those rates had increased and were no longer available. If you’d like to be notified of what rates are daily, let your banker know.

•    Don’t push your luck. Pre-determine your ideal rate and lock in as soon as rates reach that mark. Holding out for further decreases is not recommended because those decreases may never occur and you will have missed out on your ideal rate.

•    Act quickly. Rates are quite volatile and have been known to change numerous times during the day. If you need help at any time, please call me at 964-5626. I would be happy to assist you.

Information provided by Gary Presnall, President, Valley Bank, 210 N.E. Delaware Ave., 964-5626,

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