Homeowners potentially interested in refinancing need to sort through an array of questions: When does refinancing make sense-and when does it not? What costs are likely to be involved, and what other questions should they ask their lender? And what does the proverbial crystal ball say about interest rates?
The central question of whether it's the right time to refinance revolves around how much you're likely to save, how long you plan to be in your home, and thus how quickly you would recoup the closing and other costs you have to lay out, lenders say. But whether you might want to change the terms-say, by reducing the length of the loan-also can be a factor.
CCLT homeowners are required to get authorization from the CCLT in order to refinance. As referenced in the Covenant that all CCLT homeowners record (Article 8.1), CCLT homeowners cannot take equity out when refinancing until they have been homeowners for three years. At that point, up to 80 percent of the equity allowed can be taken out. CCLT Homeowners must also refinance with one of the CCLT Participating Lenders. (Click here for a list).
Teresa Lambarry, outreach director for CCLT, says CCLT homeowners need to keep in mind that they're in a limited equity situation, which means that they will sell their home for the affordable price, not the market value. "Most of the time, it's better not to use the equity," she says. "If they do, when they sell the home, they may not have anything good to show for it. I don't want to treat my property like an ATM machine. What we saw back in 2007, prior to that, a lot of people were doing that."
With today's relatively low interest rates, CCLT homeowners should consider reducing the length of their loans, Lambarry says. "It might be to your advantage to ask, 'What would be the interest rate on a 15-year?' " she says. "If it's a very good rate, ask what the payment would be. If it's an additional $100, but you can get done in 15 years, should I do it? Is it comfortable for me?"
When to Refinance?
Versi Garrett of Neighborhood Housing Services of Chicago says it probably doesn't make sense to refinance unless you're going to see at least a 2 percent drop in your interest rate-maybe 1½ percent if that causes a reduction of at least a few hundred in your monthly mortgage amount. "It's probably case by case," she says. "Each person has to look at what they would consider a big savings."
Private lenders don't see the need for quite as large of a drop in interest rate. Leony Tavas at Wintrust Mortgage figures that an interest rate of at least 3/4 percent to 1 percent lower than a homeowner's current mortgage is worth considering. "You need to weigh the savings vs. the closing costs, and how much time it will take to recoup," she says. And if you can shorten the length, "that is even greater than just lowering the payment because you will amortize shorter term."
Kelly Price, senior mortgage loan consultant at Wintrust, figures that if people break even within a year, once they calculate the savings vs. the closing costs, it's worth doing a refinance. Although "if they're holding their property longer, the break-even point could be two or three years," she says. To make that happen, homeowners usually need at least a ½ percent lower rate, although CCLT buyers might need something closer to 1 percent because it depends on loan size, she adds.
To Shawn Howard of Wells Fargo, homeowners probably need savings of at least $50 to $100 per month to justify a refinance-unless they're changing the terms of their mortgage. "If you're going from a 30-year to a 15, and then you're going to try to pay off the mortgage earlier, that could be a benefit to your family even though the payment might not decrease, and might even go up," he says.
Larger mortgages only need about a ¼ percent increase, but most homeowners would need at least ½ percent, says Tom Meneses, CRA sales manager and vice president of mortgage banking for Standard Bank and Trust.
"What they should be looking at is the math," he says. But sometimes, homeowners refinance for other reasons-if they're having trouble making payments, they might want to lengthen the loan and thus reduce their monthly amounts. "It's different from person to person," he says.
Homeowners sometimes refinance to tap the equity in their home for cash, but that should be for a purpose like home improvements or paying for a child's college education, not monthly expenses like credit card bills, Tavas says. "That's a vicious circle," she says.
What to Ask Lenders?
Regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have kept closing costs and fees under control, lenders say. "It's pretty much a level playing field right now," Tavas says. "There aren't exuberant closing costs right now because of regulations." Homeowners should ask about appraisal, application and origination fees, as well as issues like how long their interest rate is locked and what happens when that rate expires, she says.
In addition to asking the lender, Garrett suggests scanning required Good Faith Estimate statements for underwriting, processing and other fees. "We don't charge for those," she says. "You have to look at the points being charged, although that's probably better now that there's more [government] oversight. ... Prepayment penalties supposedly have more or less disappeared, but I'm seeing some of the stuff people were doing before the [housing] crisis. They seem to be sneaking back into some of those habits. Read the fine print."
Price says to expect total fees in the $1,800 to $2,500 range. She suggests talking to lenders to make sure the refinance would not result in mortgage insurance, or any prepayment penalty; and if they're taking on an adjustable rate mortgage, to make sure they understand the terms.
Meneses says to expect average fees between $1,500 and $2,000. Title fees should be about $600, appraisal fees $350 to $400, and processing or underwriting between $700 and $900. "That's it," he says.
Howard says total fees should come closer to $1,000, with title charges no more than $300 to $400. He suggests that homeowners also ask about the type of loan-FHA, VA or conventional-what mortgage insurance might cost, are there payment penalties, and who's going to service the loan. "That's huge," he says. "You go to brokers, and they don't know who's going to handle paying off the taxes, paying off the insurance."
What About Interest Rates?
Most lenders expect interest rates to stay steady and perhaps inch slightly upward later in the year. Tavas guesses they will be ¼ percent to 3/8 percent higher by the end of 2015. Price says, "We're seeing rates go up a little bit and may see them go up a little more toward the end of this month."
Howard says the rates are stable now but might rise somewhat, which makes this a good time to refinance if it's on your mind. Meneses expects rates will inch up by the fall but not by much. Although he can't be entirely sure. "If I knew the answer to that, you wouldn't be talking to me right now," he says with a laugh.
"I don't know they're going to move," Garrett says. "One article says the industry is coming back and lending is up. And then the next week you read, lending is down."
CCLT participating lenders will be available at the Wednesday, March 25th Refinance Fair, which will run from 5:30 p.m.-8:30 p.m. at City Hall. Homeowners are invited to learn more about refinancing and, as time allows, sit down with a lender to apply for a prequalification. RSVPs to attend were due yesterday -- but will be accepted until today (Friday) at 4:30 p.m.
