Smart Refinancing

3/31/2009 @ 12:03 AM in Blog > Finance > Real Estate



If you own a home you should always be on the look out for falling interest rates on your mortgage. Most of my friends are new home owners within the last 2-5 years (like myself) and some of us have taken bigger hits than others, both in value of our homes and on our mortgage rates. I've found that not everyone is on the up and up on interest rates and the way mortgages really work. The goal of this post is to share what I've learned over the past few years from owning a home.


I initially had 2 loans ... a 5/1 ARM and a HELOC (home equity line of credit). The reason I had to do this was because I didn't want to get into a "jumbo" loan and the interest rate for HELOC's at the time was a low (4+%). I quickly learned that a HELOC is dangerous (or anything with a variable interest rate) as I watched the interest rate almost double over the course of a couple years to over 8%. Time to refinance. Over the years that I had owned the home I managed to pay off the entire HELOC which made me happy as I wasn't paying high interest on that money. The right time came around and I managed to refinance to a single non conforming loan. A good friend of mine did my refinance and in the process I learned a few things:

• Use A Broker You Trust
  This is probably the most important thing I've learned. Mortgage brokers don't always have to have you (the home buyer) in their best interest. The reason I say this is because the higher the interest rate they sell you on the more they get paid. You really need to work with someone that you trust and who you know has you in their best interest. It may be hard to find, but try.
  




• Use A Smart Broker
  Not only smart, but hard working. What I like to do is tell my broker to always be on the look out for an opportunity for me to refinance 24 hours a day 365 days of the year. A broker that knows what they're doing also helps just a little bit.
  




• 0 Points & 0 Fees
  Always finance or refinance with 0 points and 0 fees. Lower interest rates with points and fees may sound appetizing, but it makes it much more difficult to compare loans throughout time. For instance say in 2000 you got a loan at 5% with a points and b fees (a and b are variables). If you're offered 4.5% in 2002 with c points and d fees (c and d are variables) you need to make sure it's actually worth your while to even refinance. You may actually lose money if the variables reach certain values. If you always go for a 0 points and 0 fees loan you always have a baseline for comparison no matter when you secure the loan and the decision to refinance should be easy. Say your rate is 5% in 2000 with 0 points and 0 fees and in 2002 you're offered 4.5% with 0 points and 0 fees ... ok I think I can stop there.
  




• Stay Away From Variation
  Any time you have a variable interest rate it's a big gamble. 3 years can go by really fast and in this economy you never know what's going to happen. If you have to get into some form of variable rate (x/y ARM or something) be sure it's at least 7-10 years at a locked rate you're comfortable with. This comes from my experience with my HELOC interest rate that doubled faster than I could blink. Luckily my loan amount wasn't very high so I could pay it off over a couple years. I also got lucky with my initial 5/1 ARM because rates dropped and I could refinance before my interest rate started to go variable.
  

So those are my general tips on mortgages ... pretty basic stuff, but you'd be surprised how many people love paying on points and fees. When you're up to date and aware of what's happening with interest rates you can actually save a lot of money by locking in a lower rate.

If you need a recommendation for a broker in California, Lucy does a fantastic job (tell her I sent you).