Borrowers Continue to Save Money Through Refinancing
With the recent drop in interest rates, Nations Lending loan officers are being asked by their clients whether or not this is an opportune time to refinance.
Although our LOs have large databases containing past clients who could benefit from a refinance, it is very borrower-specific.
But Nations’ LOs are telling clients that there are certain qualifying criteria that must be met to determine eligibility for a refinance. For a “rate and term” refinance to lower the monthly payment, the payment must decrease by 5% or more and the cost of the refinance has to be paid off by savings within 48 months or less. As an example, for a $400,000 loan with an interest rate of 4.125%, the monthly payment is $1,939 per month, to save 5% the monthly payment needs to be reduced to $1,842. This type of calculation can be done using a mortgage calculator, by inputting the current loan amount and the needed payment, amortize for 360 months and the necessary rate will appear.
Many of our originators are dealing with borrowers with mortgage insurance and home price appreciation. There the savings can occur more quickly, by either lowering the MI or eliminating it all together. If refinancing to reduce the mortgage term, then the saving 5% rule does not apply. Similarly, cash-out refinances don’t need to qualify for the 5% savings rule if used to pay off debt or if funds are utilized to remodel a home.
Another method is to alter the existing loan into a new loan by maintaining the same mortgage payment, but with a lower interest rate with cash at closing. For example, if a Nations Lending borrower refinanced with an interest rate of 3.75% on a $417,000 loan, subsequently lowering the monthly payment by $8 per month allowing for $27,000 in cash at closing that can go towards a remodel. It may also be advantageous to price refinances so that closing costs and escrow and title fees are built into the rate.