Near record lows, the rate on a thirty year fixed rate mortgage is now 4.1%, and fifteen year rates are even lower, at 3.4%.
Should you refinance your home?
You've probably asked yourself and your colleagues (or maybe even your financial advisor), "Should I consider a refinance right now?". Let's do some back-of-the-envelope financial planning to find the answer.
Get the 27-second answer.
- Find your old rate. Look on your mortgage statement, or call your lender to ask what your rate is right now. That's 20 seconds plus maybe ten minutes of hold time listening to the Muzak version of Barry Manilow's "Can't Smile Without You".
- Find "the spread". Take a second to subtract the new rate from the old one. The new rates are in the first paragraph, above.
- Find your Breakeven Period. Divide the spread into 2%; that's 2% divided by the spread. Two more seconds. Tick tock.
- Think about how many years you plan to stay in your home. That's three seconds, or maybe three days if you're debating about moving, staying, or remodeling.
- Decide. Compare your Breakeven Period to the number of years you plan to stay in your home. If you plan to keep your home for longer than the Breakeven Period, it's time to consider a refinance. That's the final second.
Congratulations"¦ you're done.
Let's take a closer look at the numbers.
Generally, a refinance costs about 2% of the overall loan amount, so if the new rate is one percentage point lower than your old rate, it you will need to stay in your home at least two more years just to break even on the refi, and you'll need to stay put longer than that for it to make sense.
Does "refi" seem easier said than done?
In the New Normal, it's more difficult to get a mortgage, even if you're a doctor. Physician families with a high credit score and plenty of cash in the bank are having to submit to silly scrutiny and provide piles of paperwork. I guess this attention to detail might have prevented the New Normal from happening in the first place, but I digress.
Certain factors may complicate your loan. For example:
- You owe more than $417,000) and you have less than 20% equity in your home.
- Your home is "upside down" and you owe more than it's worth.
- You're a young doctor and you had a habit of not paying your bills on time during your training.
- You're trying to refinance a home you don't occupy, like a vacation home or rental property.
- You're a self-employed physician and you've been in practice less than two years.
- You want to "cash out" or borrow more than your current loan amount.
- You got sued and declared bankruptcy in the last two years.
- Your credit score is 680 or less.
- You have more than four properties with mortgages (hard to imagine, but I've seen it).
- You owe a bunch of money compared to what you make, so you have a high debt-to-income ratio.
None of these challenges mean you can't refinance. It's just that your loan may be more expensive, and you might need some help navigating the system.
Maybe you should take a second look.
No matter where rates are at today, some physician families have simply given up hope because some lender somewhere told them, "It can't be done." Other doctors believe that a divorce or bankruptcy will makes it impossible to refinance.
Lending rules change, things at the bank change, and no two banks approach lending from the same angle. Rates are very, very low right now and it would be great if your family could benefit, too. If you want to refinance and it's been more than a year since you tried, I encourage you to try again, pronto.
So what can you do now?
Take 27 seconds and consider a refinance. If you think it's time to go for it, start shopping for your loan.
If you don't know how to shop for a loan, or if you'd like to save a chunk of change and not waste time doing it, call me at 541-463-0899 or email me at firstname.lastname@example.org so I can share a few tricks of the trade to help you get on track and headed in the right direction.