With historically-low interest rates upon us, there has never been a better time to refinance your mortgage. "While rates may have been a little lower in the 50s and 60s, they are now the lowest anyone has seen in the recent generation of homeowners," according to Scott McElmurry, president and CEO of Bank of Little Rock Mortgage in Arkansas.
With that in mind, it's probably no surprise that so many people are choosing to refinance in 2013. Why is that? Because according to Joe Libin, a loan officer with Graystone Mortgage in Salt Lake City, UT, those low interest rates mean you can’t go wrong by taking out a new loan.
Here are three stories of people who took advantage of these rates - and saved big time.
Success Story #1: Refinancing to keep their first home, and buy a second one
Gene and Sheila P. are both in their early 40s and work in the medical field. He is a medical educator and trainer, and she works in nursing.
A few years ago, they packed their bags and left their home in Illinois to relocate to Texas for a job transfer. But Gene and Sheila weren't ready to sell their home in Illinois. Instead, they decided to rent it to a tenant to try and cover some mortgage costs.
The initial mortgage they took out in 2007 was for $270,000. It was a 30-year fixed-rate loan at an interest rate of 5.875 percent. The monthly payments were $2,304. The property, a 2,066 sq. ft. home, has three bedrooms, 2.5 bathrooms, and a 2.5 car garage.
Once they moved, the couple made the decision to also buy a home in Texas. However, they knew they couldn't afford an additional home in Texas without lowering their monthly payments on their Illinois property first. The solution? Refinancing the mortgage on their Illinois home to a lower interest rate.
"A lower payment would get them closer to breaking even monthly, where their rent received from the tenant paid the mortgage," says Dylan Kramer, a mortgage consultant at American Portfolio Mortgage, who helped the couple refinance. The rent they received from their tenant was $1,700 a month - which meant they had to personally cover over $500 per month to make up the difference between their mortgage payment and their rental income.
But getting the refinance wasn't necessarily smooth sailing. "The balance of the mortgage was $252K when they came to me, but the value [of the home] was estimated to be under $250K," Kramer says. In most situations, this would mean that they would be unable to refinance without paying down the loan to get out from "underwater". This is the term used in situations where the value of the home is lower than the balance on the mortgage.
However, their 2007 loan was owned by Fannie Mae, so they were able to refinance through the government Home Affordable Refinance Program (HARP). HARP is a federal housing program that helps underwater homeowners - who got their original loan through Fannie Mae or Freddie Mac before May 31, 2009 - refinance.
So what was the result? Gene and Sheila P. were able to refinance for a new loan of $261,400 at 4.875 percent. "The new loan is also a 30-year fixed and the payment is $2,045 versus the $2,304 that they had before," Kramer says. That's a savings of $261 per month. "Thanks to the refinancing, the clients met their objectives in getting the payment closer to the rent being received," Kramer explains.
Success Story #2: Reducing monthly payments without "resetting" the loan term
Dawn and James Cohen, a 36 and 38-year-old married couple, respectively, who both work in the medical industry, wanted to refinance to reduce their monthly mortgage payment. But they wanted to do it without starting over with a new 30-year term.
Their original mortgage, taken out in 2009, was a 30-year, $288,000 loan with a fixed rate at 5.250 percent, explains Glenn Toher, director of sales at DLJ Financial in Irvine, California, who handled the Cohen's refinancing. Their monthly mortgage payment was $1,590.35.
The Cohen's 1,890 sq. ft. home has three bedrooms, two bathrooms, and is set on a 6,650 sq. ft. lot.
The couple was able to refinance to a rate of 3.375 percent.
The great low rate was due to a number of things: First, they had great credit ratings - over 740, which Toher says is considered A+. "They also had great equity at the time," Toher adds. The couple had a 60 percent loan-to-value ratio on their home - meaning they owned 40 percent - which typically scores you the best rate the market offers, Toher says. Plus, the couple had steady jobs, (he's a manager of a medical supplies company and she's a nurse) which also contributed to the low rate.
In addition to their great rate, the couple didn't have to start over with another 30-year term. Instead, the new mortgage was a 25-year fixed-rate, which didn't add any more years to their loan. With the new interest rate, they lowered their monthly payments to $1,294.14 - savings of $296 a month.
Success Story #3: Refinancing a devalued home
Sarah Gibbs, a physical therapist, was in her mid-50s when she purchased her home at the height of the market for $309,500 in 2008.
"When the appraisal came in last fall, the value had dropped to $180,000," says Paul McFadden, a loan officer with The Legacy Group in Bellevue, Wash., who worked on her refinance. "The home had lost value due to all the distressed properties sold in the area."
McFadden started working with Gibbs after she was referred to him by her financial advisor. She owed $273,000 at an interest rate of 6.375 percent on her three-bedroom, two-bath home with 1,500 sq. ft. of living space.
At the time, the monthly payment on her 30-year fixed-rate mortgage was $2,062.
Since she owed $273,000 on the property, but the home's value of $180,000 was well below that, refinancing through a conventional loan was nearly impossible.
"The good news is she could refinance as her credit was strong and she had other assets," McFadden explains. She also qualified for the new HARP 2.0 program, as her loan was owned by Fannie Mae, and was originated and closed before May 31, 2009.
"Since her original interest rate was over 6 percent, she stood to save quite a bit by refinancing," McFadden says.
The result? Refinancing gave Gibbs a 30-year fixed mortgage at 4.25 percent for a loan amount of $273,000. The new monthly payment was now $1,607, for savings of $455 per month.
"This loan was especially gratifying as she was able to save a significant amount per month, and it helped with her future planning this year, including paying for a wedding," McFadden says.