Standards for refinancing your home have changed over time, starting with a $0 cost refinance process

Many times we have clients that come to us that don't think dropping .5% on their mortgage is worth refinancing due to the charges that they would have to pay for their refinance.  This may have been true many years ago when refinances almost always cost thousands of dollars and also came with pre-payment penalties for the first 3 years that were as high as 3% of their loan amount.

Pre-payment penalties are no longer common (or legal in many cases) and refinances that only include options with hefty fees is a thing of the past.  This means that not only can a borrower refinance 6 months after they most recently refinanced, they also aren't required to start over on their 30 year term if they get another 30 year fixed if they don't want to.

Because the mortgage industry is so competitive, it is very common, if not industry standard, to offer absolute $0 cost refinances where there is even a credit to cover third party fees (title, escrow, notary, recording charges, etc.).

The bottom line is that anytime a homeowner can reduce their rate at $0 cost to them, it makes financial sense so long as there is not a pre-payment penalty on their loan.  Take the following 3 scenarios for instance:

 

Homeowner 1: 

We had a recent customer that came to us to refinance their primary residence property on a 30 year fixed from 4.5% with a $2,280.08 payment.  We showed them a $0 cost refinance on a 30 year fixed at 3.875% with absolutely $0 closing costs with a payment of $2,081.83.  His concern was that it was not enough benefit because he would have to start over on his 30 year term and that the $198.25 in monthly savings wasn't enough to outweigh the cost of starting over on his term.  We were able to show him that, because there was no pre-payment penalty, he could keep making the same payment he is making now ($2,280.08) and have it paid off 42 months sooner and save $116,000 in interest over the course of the term.

Homeowner 2:

We had a recent customer who wanted to look at refinancing their home, take cash out, but didn't want to increase their loan term.  They were also very payment sensitive and didn't want to pay any fees for the refinance.  Prior to calling us, they were thinking that it made the most sense to take out a car loan from the car dealership at 5% interest as opposed to looking at their mortgage for restructuring.  We showed them if they refinanced their current mortgage of $393,547 @ 4.5% on a 30 year fixed with a principal and interest payment of $2,026.74 we could get them a car without changing anything.  They were 1 year into this mortgage and therefore, had 348 months left to pay.  We were able to show them that if they did a $0 cost refinance at 3.875% and took $29,000 cash out with a new loan amount of $423,000, they could have the same payment that they are making now and have it paid off in the same amount of time.  This eliminated them from having to get a car loan and pay $7,632 in interest on top of the $29,000 they received.

 

Homeowner 3:

We had a recent homeowner who was saving up for retirement and wanted to make sure they set aside $3,000 per month to ensure adequate savings for retirement and they didn't feel comfortable refinancing out of their 4.5% 30 year fixed to a 3.5% 15 year fixed.  Savings for retirement is very important and should all be carefully considered.  This is why we showed him that if he looks at a 15 year fixed at 3.5% with a payment of $3,216.97 as opposed to his current 30 year at 4.5% with a payment of $2,280.08 he would save $240,000 in interest over the course of the term.

The bottom line is that there are many different approaches and countless strategies that allow you to use the mortgage amortization calculator to your advantage.  When it comes to home financing, no scenario is the same and everyone has different priorities.  It's important to fully understand the options that are available to you to ensure you are putting your family in the most advantageous situation possible.

Jason Vondrak

Company President

Prospect Financial Group

948 Garnet Avenue

San Diego, CA 92109

NMLS: 349089 | BRE: 01837707

Jason Vondrak has been in the mortgage industry since 2004 and co-founded the mortgage brokerage Prospect Financial Group in 2006 in San Diego, California. Today he serves as President and CEO of Prospect Financial Group and the president and founder of Prospect Property Group, a real estate development company, established in 2012.

"I've had the privilege to serve in an industry that exists to ensure homeownership remains among the top priorities of government and citizens alike. Over the years, it has been a pleasure working alongside homeowners, real estate professionals, and business associates combining efforts and teaming up to help homeowners realize the dream of home ownership."