SLADE COLUMN: If at first you don't succeed, try and refi again
If at first you couldn't refi, maybe it's time to try again.
Mortgage interest rates continue to hover around generational lows, offering many homeowners a chance to refinance and build equity more quickly, reduce monthly mortgage payments or both.
Lots of homeowners who would like to refinance have been unable to do so during the past few years because home prices fell, reducing homeowners' equity.
Banks typically want mortgage borrowers to have at least 10 percent equity in a property before they will approve a refinance. Equity is the property value minus any debt secured by the property, so if your house is worth $150,000 and you owe $135,000 on a mortgage, you have equity of $15,000, or 10 percent.
The good news for those hoping to refinance is home values started rising last year in many areas after a years-long slide, and when a property becomes worth more, the homeowner has more home equity.
Anyone who took out a mortgage before housing prices crashed stands to save a good deal of money by refinancing, assuming they plan to stay in the home for a while.
The 30-year mortgage rate was hovering around 6.5 percent at the end of 2007. On a loan of $150,000, that's a monthly payment of $948.
Today, someone with good credit and enough home equity can get a 30-year mortgage with a 3.5 percent interest rate. On a $150,000 loan, that's a monthly payment of $674, saving the homeowner nearly $3,300 yearly in payments.
And with a lower interest rate, you also build up home equity more quickly, because less money goes toward interest.
For example, a borrower paying off a $150,000 30-year mortgage at 3.5 percent interest would own $1,200 more of their home by the end of the first year, compared to a borrower with a 6.5 percent interest rate. So the person with the lower interest rate pays far less each month, yet gains more home equity.
There are lots of formulas and rules-of-thumb for deciding if it makes sense to refinance. I think people should ignore them all, and actually compare their current loan with their refinancing options.
With a good, free, online mortgage calculator — my favorite is at Bloomberg.com under “personal finance” and then “calculators” — you can calculate different loan options and compare them, and you can see how much money would go to interest versus principal each year.
That's how I ran the numbers on the example I used earlier.
Other factors to consider:
Think about the loan term. If you took out a $150,000 loan at 6.5 percent at the end of 2007, you've already made five years of payments and have 25 years left to pay. You've also paid down more than $21,000 of the loan balance. So you're not refinancing a 30-year, $150,000 loan, you're refinancing a 25-year $129,000 loan. In that example, you could refinance into a 20-year loan at 3.5 percent interest, shave 5 years off your remaining loan term, cut your monthly payments by $200, and build equity faster.
There are costs associated with refinancing, typically several thousand dollars in fees and lender charges. Shop around for the best deal, and consider those costs when deciding if it makes sense to refinance. You'll need cash to pay those closing costs, or enough home equity to roll the costs into the new mortgage.
If you apply for a refinancing, you'll still have to pay for the appraisal even if the bank-ordered appraisal determines that your home is worth less than you thought and that you don't have enough equity for a new loan. If that happens, check to make sure the appraiser didn't make mistakes that would underestimate your home's value, such as getting the size wrong.
If you want to refinance, but you don't want to get stuck paying for an appraisal for a loan that won't go through, how can you be confident about what your home is worth?
You can't be sure what a bank-hired appraiser is going to conclude, but you can assume they will err on the conservative side when it comes to home values.
What you can do is some research to get a solid idea of where you stand before you apply for a loan.
Local searches of real estate for sale, on postandcourier.com and other websites, can show how homes like yours are being priced for sale. If you know someone in the real estate business (maybe the agent who sold you your home?), ask for information about recent sales of comparable properties and calculate what the buyers paid on a per-square-foot basis. That's the same standard appraisers use to determine property values.
Websites such as Zillow can show you what homes have sold for in your neighborhood and provide estimates of how prices have changed over time in your town and your ZIP code. They also will estimate what your particular home is worth, but I think the price trends for an area are more useful.
For example, Zillow estimates homes in my ZIP code are worth about $20,000 more than in February 2009, but they also estimate my home is worth less, for no particular reason.
National reports say home prices rose about 6 percent last year and could rise 5 percent to 10 percent more this year.
Locally, results vary by location, but the supply of single-family homes for sale in popular areas with good schools has become tight, indicating strong demand that should boost prices.
Reach David Slade at 937-5552 or Twitter @DSladeNews.