Sunday, April 6, 2008


The economists can argue all they want as to whether we’re experiencing a “statistical recession’. The bottom line is this economic slowdown means tough times and at least some belt tightening for most (at best), job loss, very difficult financial times, and possible bankruptcy for some (at worse). Moreover, the “silver linings” to be found in this downturn are few and far between. However, as with virtually all bad times, at least a few silver linings do exist. One is that interest rates are down, including those on mortgages. This, of course, is of small consolation to those who, due to lower income, lower (or no) equity in their property, and/or stringent (and, in far too many cases, very overly stringent) underwriting standards on the part of suddenly “CYA” leaning mortgage underwriting departments. However, with 30-year fixed rates again back below 6% (a least as of this writing), for those with satisfactory income, equity and credit scores, now can be a very good time to refinance.

Unfortunately, many home owners are unaware of this opportunity, both because much of the media has made it look like finding mortgage money is impossible today (not true!), and because so many people still labor under the long prescribed refinancing rule of thumb that one should never refinance unless you can lower your rate at least 2%. Such a rule of thumb was suspect, at best, when it was first “introduced” some 50-plus years ago. Today, such a rule of thumb is, to be blunt, stupid. So then, what is the prudent rule of thumb for refinancing?

· Refinance if you can save money by getting a lower interest rate, and/or,
· Refinance if you can gain security by switching from an adjustable to a fixed rate
mortgage. (Never refinance to an adjustable rate mortgage!)

However, unless you’re refinancing solely to get out of an adjustable mortgage, before you go forward, be certain that the monthly savings you'll realize by refinancing will be recoup the cost of refinancing within the remaining time period you plan to own the property – and, preferably, much sooner.

The formula for determining how long recouping the cost of refinancing will take, is as follows: Divide the cost of refinancing – closing costs, points (if you pay any), and, if required, private mortgage insurance (PMI) – by the amount you'll save each month. However, since its not always possible to know exactly how long you’ll retain ownership of the property, plan on keeping the property for a minimum of five years before you refinance. There is, however, one major exception: if you can lower your interest rate with a no point, no closing cost refinance mortgage, that’s a no brainer – definitely to ahead and refinance.
(For more information on financial rules of thumb in general, and refinancing in particular, check out the website, and/or, via the website, the e-book, “Your Bottom Line: Fifty Steps to Firm Financial Footing.”)

Two last pieces of advice: if you find you qualify for a refinance, it’s probably best to lock in your rate immediately. Rates, of course, can always go down further, but they also may go back, up, and since they’re currently back down near a 40-year low, you don’t want to miss out on the opportunity to get a great rate. Second, be certain to tune into “The Money Show” every Saturday and Sunday, where we will continue to give you up to information on the current mortgage/credit “crisis/fiasco” in general, and mortgage interest rates, terms and qualifying standards in particular.