Don’t Worry, Be Savvy

Study your options when considering home refinancing

By Gail Martineau

Thirty-year. Fixed-rate. Amortize. ARM. Short-term break even.

If these words sound familiar, you’ve likely been down the home refinancing path. But with each change in the you can’t use a rule of thumb, like saving 1 percent,” says Woodson, who works out of the bank’s Worthington branch. “It depends on loan size, the different in interest-rate saving and the cost associated

There are a number of reasons to consider refinancing your home, says Jarvis Woodson, a vice president of residential lending sales at Farmers Citizens Bank. But there’s no such thing as blanket advice, he says.

At the moment, Woodson is noticing two key trends in the refinancing market. Both relate to saving money over the

Some homeowners are choosing to refinance their mortgages to lower their monthly mortgage payments. Because current interest rates are low – in the 4.25 percent range for 30-year fixed terms –homeowners can find savings in refinancing and keeping the loan terms.

“What’s interesting about interest rates is they are counter to the economy,” Woodson says. “When the economy is struggling along, it generally keeps the interest rates on mortgage loans down.”

To illustrate this point, Woodson gives the example of a homeowner who refinanced his loan after only three years of a 30-year term. To keep the same length of term, Woodson calculates the homeowner’s new cost based on 27 years rather than 30 years. Though the homeowner paid the normal refinancing fee, which generally ranges from $2,500 to $2,700, the decrease in interest spread over 27 years had the homeowner paying significantly less in interest over the course of the 27-year term.

This isn’t the case for every homeowner, though, Woodson cautions.

Similarly, what other homeowners are doing is decreasing their loan terms from, say, 30 years to 15 years. Interest rates on 15-year terms are much lower now – about 3.5 percent – because the banks are committing money for half the amount of time, Woodson says.

“From a lending standpoint, there is less risk,” he says.

In many cases, the homeowner will end up paying a higher monthly rate, but less in the long run.

“I’m seeing folks go from a longer term to a shorter term, sometimes with the same payment, sometimes with slightly higher payments,” Woodson says. “It’s a more conservative approach.”

Because of concern for the long run, many homeowners also are looking at refinancing and adding second mortgages, or home equity lines of credit, for large remodeling projects.

“A lot of people right now are concerned about the economy and about moving and buying more expensive homes,” Woodson says. “A lot of them, right now, are remodeling the homes they’re in.” home equity lines of credit are usually good for 10 years and function much like credit cards, though there is no actual plastic card. home refinancing isn’t rocket science, but many consumers become confused with bank jargon, Woodson says.

When thinking about taking out a home equity line of credit out, homeowners should make sure their projects will increase the value of their home or at least pay for themselves, Woodson says. Projects that tend to pay 100 to 125 percent back are kitchen remodels, master suite remodels and basement finishing, he says.

“It’s really about comparing like terms to like terms,” he says. “That is really how you determine the value of the loan.” v

Gail Martineau is a contributing writer. Comments and feedback welcome at gbishop@ pubgroupltd.com.

Trade Terms: Amortization

The process of decreasing the loan amount over the course of a loan term

Good-Faith Estimate

This is required by law and provides customers the ability to compare loans costs and terms.

ARM

Otherwise known as adjustable rate mortgage. Comes in fixed-term and adjustable-term. The loans usually begin with either three-, five- or seven-year fixed rate terms and then are adjusted yearly based on a set index.

Short-Term Break Even

The cost of refinancing vs. the value in payment or interest savings for a refinanced loan. After refinancing, how many years does it take to break even?