Best Time to Refinance

Bills.com suggests pros, cons of refinancing in today's bumpy market

SAN MATEO, Calif., Oct. 18, 2006 - Home mortgage rates are up half a percent from one year ago, but down half a percent from March -- and while this latest rate decrease has led to a surge of home refinancing activity, Andrew Housser, co-CEO of Bills.com, suggests homeowners consider the pros and cons of refinancing in their situation before they sign up for a new deal on their home loan. "Some homeowners are sitting on adjustable rate mortgages (ARMs) wondering if now is the time to refinance to a fixed-rate loan. They worry -- and rightly so -- about payments increasing, especially in an atmosphere where home values might decline," Housser said. "Other homeowners want to use cash from their equity to pay for kids’ college tuition, take advantage of lower prices to put a down payment on a second home, or remodel existing homes." Predicting mortgage rates involves researching a complex set of variables, explained Housser, including companies that buy and sell mortgage loans, the status of inflation, financial markets, and the state of U.S. currency. In light of the confusing market, Housser's company, Bill.com, suggests the following tips to help homeowners decide if they would be wiser to refinance now or keep their current mortgage. Pros: Refinance now if …

  1. ARM rates are rising above market rates. As interest rates increase, ARM loan payments do, too. Homeowners concerned about payments, and whose rate is higher than current fixed mortgage interest rates, might consider refinancing. "Many economists forecast basically stable interest rates through Thanksgiving or so, but with the amount of uncertainty in financial markets, there's no telling," Housser said. "You can begin the process with a mortgage lender and have him or her watch rates for you to establish a good time to lock your loan."
  2. Refinancing is affordable. Refinancing involves expenses that can total around 2 percent of the total loan amount. Typically, financial advisors suggest refinancing is worthwhile if the savings on payments will pay for the refinancing costs within two years. Homeowners can calculate their own "break-even" date by dividing the up-front cost (the figure on the Good Faith Estimate form) by the anticipated monthly savings. The answer is the number of months it will take to pay off the refinance -- and sooner is better.
  3. You've grown roots. Homeowners who plan to stay in their homes for a long period of time might find that refinancing makes sense. "If you have a long term left on your mortgage payments, and your rate is higher than market rates -- or you have an ARM or balloon-payment loan and want the security of a fixed rate -- you'll likely meet the "break-even" criteria outlined above," Housser said.
  4. One loan is better than two. For homeowners with a first mortgage as well as a second mortgage with a high rate, refinancing can combine the two loans into one. Second mortgages usually have adjustable rates. If the second mortgage has a hefty balance, today's borrowers might be better off rolling the two loans into one. Compare current loans with refinancing options with an online calculator such as the one at http://www.bills.com/home-refinance/.

Cons: Wait to refinance if -

  1. Credit isn't stellar. Those who have made credit mistakes (such as late payments, especially on the mortgage) will benefit from spending a few months cleaning up their act before applying for a refinance. Paying on time and reducing or eliminating credit card balances will earn a better refinanced mortgage rate.
  2. Life is in flux. Homeowners should not invest in refinancing if they might sell the home within a year or two. "Divorce, job relocation, or even a big raise might make you rethink your residence," Housser noted. "Refinance when your life is more stable."
  3. The clock is ticking on private mortgage insurance (PMI) payments. Most lenders require PMI for borrowers whose mortgage balance is greater than 80 percent of the price of their home. When the loan value falls below 80 percent of the home’s value, borrowers may be able to request elimination of PMI. Some loans may even require borrowers to refinance to eliminate PMI.

Removing PMI will give most borrowers an immediate monthly payment reduction of $100 to $200 (the mortgage statement lists the specific payment). "You may decide to hold off on refinancing if you see falling below the 80 percent loan-to-value mark soon," Housser explained. "In this case, waiting a few months to refinance could mean significant savings by eliminating your monthly PMI payments." Housser pointed out that refinancing can be a good way to get a better mortgage, "but it isn't the be-all and end-all for every borrower. Take time to educate yourself and weigh the pros and cons of your situation before making a decision." Based in San Mateo, Calif., Bills.com is a free one-stop online portal where consumers can educate themselves about complex personal finance issues and save money by choosing the best-value products and services. Since 2002, Bills.com’s partner company, Freedom Financial Network, has provided consumer debt resolution services, serving more than 10,000 customers nationwide and managing more than $250 million in consumer debt. The company’s co-founders and CEOs, Andrew Housser and Brad Stroh, were recently named Northern California finalists in Ernst & Young’s 2006 Entrepreneur of the Year Awards.