Texas Tech University

Lubbock Avalanche-Journal: Low interest rates mean good time to refinance

May 22, 2012

In general, diminishing rates make it an optimal time to refinance, but there are several things to consider before making a decision.

With interest rates as low as they've been in decades, refinancing a mortgage can look appealing.

In general, diminishing rates make it an optimal time to refinance, but there are several things to consider before making a decision.

Why refinance

Scott Hein, the endowed Robert C. Brown Chair of Finance for the Texas Tech Rawls College of Business Administration, said interest rates are as low as they were in the 1950s.

"Today is a very low interest rate environment, and many people should look at refinancing their mortgage if they have a high rate," Hein said. "A 30-year mortgage today can get about 4 percent. Compare the mortgage interest rate you're paying to that, and if you're paying 7 or 8 percent now, now is a great time to refinance because your monthly savings will be very extensive."

Bill deTournillon, president of PrimeWest Mortgage Corp., said there are three main reasons to refinance: to lower the monthly payment and live in the same house, to reduce the length of the mortgage and not increase the payment or to tap into the equity accumulated in your house and keep your payments the same.

Hein said the basic value of refinancing is lowering the interest payment on a loan, which lowers the monthly payment. Hein encourages people to consider shortening their mortgage time period.

"It's remarkable how much you can save in total payments from going from a 30-year fixed-rate mortgage to a 15-year fixed-rate mortgage," Hein said. "The payments are going to be higher on a monthly basis for 15 years, but you're going to be making twice as many payments on the 30-year mortgage, and the monthly payments are not twice that. ... You really save total payments by shortening the length of the life of your mortgage."

DeTournillon said many people have equity in their homes and use it to pay for a child's college. For example, a homeowner has a $200,000 house, owes $100,000 on the mortgage and wants to get out $40,000. The new mortgage is $140,000, and because of interest rate change, the monthly payments stay the same.

The best time

Anyone considering refinancing, must determine if they are eligible.

Hein suggested those looking at the issue contact a specific lender and working with them to see if they qualify.

Lenders also can help consumers understand the trade-off in savings. They are able to calculate a new mortgage and see how much savings will be each month, compared to the current payment amount.

DeTournillon said homeowners should not refinance if the interest rate they're paying is less than 1 percent more than current rates.

Refinancing is not a good idea if you're planning on staying in your house for less than 12 months, Hein said.

Weighing the price of fixed costs is important when considering a refinance. DeTournillon said most of the time an appraisal and a title policy are needed, and there are underwriting and administration fees for getting a new loan processed.

Shopping around

Hein said it's important to look at different lenders.

"It is very competitive, and some are able to offer better deals than others," he said. "Don't just go to one institution and feel comfortable you're getting the same deal you'd get anywhere else. There are slight discrepancies, and sometimes you can work those to your advantage."

Cade Fowler, executive officer for the Lubbock Association of Realtors, encouraged using someone local because it's easier to contact them.

Generally, Hein said, small banks don't do residence mortgage lending, so it may be necessary to go to a large bank or a mortgage broker.

Mortgage brokers bring the two parties together, Hein explained. They will shop around, go to different lenders and give you several offerings. Generally, they'll hone in on the one they think is best for you. The customer pays a fee for this service, Hein said.

More home for your money

Fowler said because mortgage rates are so low, it's also a good time to upgrade to a bigger or newer house.

"It's more home for your money," he said. "You can still keep your payments the same, but you get more square footage, maybe a newer home if you'd like some of the newer amenities in new homes. You can look at those as well."

It's something Fowler has seen in Lubbock recently, he said. People who have been looking to move are taking advantage of low rates, especially if they have a growing family or need more room. First-time homebuyers also are joining the home-buying market.

Many times, mortgage payments end up being lower than rent payments depending on the location and how new the complex is, he added.

Any time someone buys a new home, Fowler said, there are several components that help boost local spending. If the homebuyer doesn't do the projects personally, they're hiring people to paint, remodel or decorate. Local businesses benefit from purchases of furniture, supplies and appliances, he added.

DeTournillon said the more people upgrading to a new home, the better the economy is.

"You get a bigger or better, newer or nicer house for approximately the same monthly payment," he said, "and it initiates a tremendous positive impact on the community because the economy is driven by people moving up into nicer houses and building new houses, and that is the key driver to the United States economy."

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