YOUR CLIENTS CAN REFINANCE THEIR MORTGAGE FOR RATE AND PAYMENT REDUCTIONS
By Jose H. Caraballo
One of the biggest reasons homeowners refinance their mortgage is to obtain a lower interest rate and lower their monthly payments. By refinancing, the borrower pays off their existing mortgage and replaces it with a new one with better or more appropriate terms.
Refinancing typically occurs when mortgage interest rates drop or when the current mortgage no longer fits the borrower’s situation, which is the case with many homeowners that are currently in adjustable-rate mortgages with higher payments now than when they first started. Also, borrowers with recently improved credit scores (from paying off credit card debt, making mortgage payments on time, etc.) are often candidates for better interest rates, as well. If your clients haven’t checked their credit scores in a while, you should recommend they call a mortgage consultant.
The question most people will ask is: “But why should I go back into a 30-year loan?”
There are two schools of thought on this subject, and the mortgage consultant should work hand-in-hand with the borrower’s financial planner to determine what works best for their mutual client.
First, we should examine what benefits can come out of refinancing into a fixed-rate from an adjustable-rate loan. These benefits include security from rate adjustments, possibly lower payments and the ability to sleep at night.
Another option for your clients is to take the route of the “same payment” refinance, and actually pay off the loan faster and save money on interest fees in the long run. If refinancing results in a lower monthly payment, the borrower can still continue making the same payment they made in the original loan, and the extra money will be applied to the principal balance.
For example, let’s say you have 25 years remaining in your current loan, and you refinance back to a 30-year loan with a slightly lower interest rate resulting in a payment reduction of $200 per month. Note that this is just an example, and the actual amount could vary. Your client can then take that extra $200 per month and apply it toward the principal on the new loan. At this rate, the loan will be paid off in 22 years and four months, which is two years and eight months less than the original loan.
On the other hand, if the borrower’s financial planner is a proponent of best-selling author of “Missed Fortune” and investment guru Douglas Andrew’s philosophies, he or she may suggest investing the extra money in a side fund that could earn a better rate of return and grow to the amount of the mortgage, and beyond, in even less time. This method provides excellent liquidity and safety for your client, but having more access to this money may or may not be a good thing for some.
Regardless of the reason for the refinance, the mortgage consultant will need to know what the existing loan scenario entails, review the homeowner’s long-term goals and be able to explain how each loan option compares and contrasts with the various loan programs available.
JOSE CARABALLO IS BRANCH MANAGER AT THE CORAL GABLES OFFICE OF SOURCE ONE MORTGAGE AND FOUNDER OF THE SOUTH FLORIDA INSTITUTE OF EDUCATION. CARABALLO IS CURRENTLY PRESIDENT-ELECT OF THE MORTGAGE BANKERS ASSOCIATION OF GREATER MIAMI. HE CAN BE REACHED AT 305.968.1257 OR [email protected].
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