Q & A: When is the Right Time to Refinance?

The right time to refinance really is different for every person.  I have clients that refinance for several reasons –  cash out to consolidate debt, lower monthly payments (cash flow), combine first and 2nd mortgages together or reduce rate and term so it pays off sooner…. The list goes on.  Many people think refinancing is about rate spreads and fees.  Although they do come into play at some point, understanding what your goals are for the refinance makes it so much easier to get your arms around.

The conventional wisdom would have you refinancing when you see a 1% change in your current rate and projected rate.  Here are two examples that show that refinancing doesn’t just fit the standard cookie cutter philosophy,

1.        Clients staying in their home over the next 15 years might find it advantageous to refinance with a ¾% change in rate, but may extend their amortization out to increase their cash flow to increase the college fund for their children.  The rate they can earn on the 529 far exceeds the after tax benefit they are paying on the house.  Without changing their house hold cash flow they are able to maximize their budget and create a college fund.

2.       Another  client may not get enough benefit out of a 1.5% change in rate because the balance is already low enough where it just won’t make that big of an impact once fees are taken into account. 

Clearly, two separate ends of the spectrum that might make the wrong decisions because they are following the conventional “Refinance because there is 1% difference in rate” thought.

When prospective clients call me, the first question I have is: “What do you want to get out of refinancing?  What’s the short and long term goal?”   The biggest response I get is: “I want to save money”.   OK then, what does saving money mean?  The trick is to define “Saving Money.”

Now we get into rates and fees and yep you guessed, it’s really not that difficult to analyze (don’t mind my grin because I do this for a living).  For “Saving Money” clients, I look for total savings by comparing equity, the cost of the refinance if paid in cash, interest paid and cash flow spent or saved over a set period of time…. that’s all.  I know you were looking for some keen insight… and elaborate number crunching, and I’m sorry to disappoint, but, really it is that simple.  I find that most clients are confused at first, but once educated and given the information in a clean and easy to read method, can and do make really good decisions how to move forward.

All of this can be done via excel if you understand how to use the basic equation of pmt (rate, term, pv, fv) and its excel variations. 

Really most of the phone calls that mortgage professionals field these days are “can I refinance?”  The good ones [mortgage professionals] should be responding with “should you refinance?” 

If you’re a self-analyzer then get your homework done quick so you can call and confirm your thoughts and results with your trusted mortgage professional.  If you don’t have a trusted mortgage professional to discuss things with… start interviewing them, you can also feel free to contact myself or any of the Bell Mortgage loan officers to get the advice and numbers you need to make a good short and long term financial decision.

About Mikal Knotek:

Knotek has been a Senior Loan Officer with Bell Mortgage since 1997 and has been a Presidents Club member since 1998.  Mikal is versed in commercial finance and understands how to explain the financial implications home financing has on his client’s short and long term financial future.  Mikal was also designated by Minneapolis-St Paul and Twin Cities Business Magazines as a “Super Mortgage Professional” an honor given to less than 4% of the mortgage lending community.  Visit Mikal online at http://www.mjkmortgage.com/, mknotek@bellmortgage.com or call him direct at 952-278-8707.

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