Denver Home Living from Your Colorado Home Group Winter 2018 | Page 7

CURRENT INTEREST RATES
Refinance Now For What You Need Tomorrow
R
ight now, mortgage rates are about 1% higher than they
were a year ago. This means some people cannot lower
their rate at all and many won’t lower it enough to justify
a refinance. However, you can still save thousands of
dollars by refinancing now if you will need to use the equity in your
home or refinance for another reason in a few years. Here is how:
should look into refinancing now before rates go even higher.
USE OF EQUITY
People typically refinance a mortgage for the same handful of reasons:
• Debt consolidation.
• Fund college tuition.
• Buy a second home.
• Saving money when current rates are lower
than the rate on their existing loan. •
Buy an investm ent property.
•
Buy a business.
• Consolidating existing debt. •
Buy out a business partner.
• Taking out equity to pay for current expenses. • Changing from an adjustable rate to a fixed rate. • Moving to a shorter amortization to pay the loan off sooner. You can also save if you will need to use equity in your property in
the next few years. Consider the following situation where you need
$100,000 equity from your home in two years and you have a 30-
year fixed rate at 3.5% from two years ago with balance of $200,000.
The point is that all of the above reasons only take into account
current rates and needs. Rarely do people ask themselves what
they may need or want to do in a few years and where interest
rates will be at that time. Simply looking ahead and running the
numbers could save you thousands of dollars if you want to use
the equity in your home for any reason or if you are in a situation
where you need to add or remove someone from the current loan.
Option 1 – Refinance the first mortgage today to a 30-year fixed
loan at 4.25% cashing out $100,000 and keeping it for 12 years.
Option 2 – Waiting two years to refinance the first
mortgage to a 30-year fixed loan at 5.25% cashing
out $100,000 and keeping it for ten years.
Option 3 – Keep the existing mortgage and get a
$100,000 fixed rate second loan at 7% in two years.
Current rates for a 30-year fixed mortgage are about 4.25%,
a fixed rate second are about 6%, and 5.25% for a HELOC.
While many market forecasts including the Federal Reserve
expect rates to rise by about 2% over the next two years,
we will assume they only go up 1% for the comparisons.
Option 4 – Keep the existing mortgage and get a $100,000
Home Equity Line of Credit (HELOC) at 6.25% in two years.
Compared to refinancing today with Option 1:
ADD/REMOVE A BORROWER ON A LOAN
• Remove spouse per a divorce decree.
• Add yourself per a divorce decree.
• Business succession planning.
• Add yourself to the loan on real estate owned
with an elderly parent to ensure you do not have
to pay off the loan when they pass away.
• Option 2 – You will pay $9,606 more
in total interest by waiting.
• Option 3 – You will pay $2,577 more
in total interest by waiting.
• Option 4 – You will only save $4,989
more in total interest by waiting.
The point is that, even if we assume rates only go up 1% which is half
of current estimates, you don’t really save money by waiting. More
importantly, second loans and HELOCs can include adjustable
rates and balloon terms. Finally, you may not even qualify for the
loan you need in two years if lending guidelines, or your situation,
changes. Something as simple as changing jobs can prevent you
from using bonus income to qualify for a loan for 2 years.
To add to or remove a borrower from a loan, you must refinance
the loan in almost all cases. With higher rates expected,
refinancing now could save you thousands compared to waiting.
If mortgage rates rise by only 1% and you have a $400,000 30-
year mortgage, refinancing now will save you $38,747 in interest
over 10 years. You could pay points to lower your rate by 1%,
but that will cost you over $16,000 at closing. So, if you have
not refinanced to take your ex-spouse off a mortgage or want
to keep a property you may inherit that has a loan on it, you
Obviously, if you only need a small amount of money and you
can pay it off in a few years, then refinancing today will not
likely make sense. However, I know one thing for sure… I will
work with many clients over the next several years who will
be kicking themselves for not refinancing now even though
they knew they would likely need to do so. Will you?
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