September 23, 2019
Orion’s brokers are asked this every day by new and existing clients, and will continue to be a discussion topic after the Fed’s rate cut last week. Although the answer is usually “yes” experienced brokers will educate their clients on the options. There are two types of refinances, rate and term or cash-out. An important item to remember is that everything has costs, including "no cost refinances" despite what some advertising may claim. The question is, how are the costs paid in a no cost refinance? Experienced brokers know that closing costs for a refinance can be paid by adding to the loan amount, bringing funds to escrow to pay them, or taking a higher interest rate in which the lender will pay a portion or all of the closing costs.
Explain that a rate & term refinance does not involve pulling any money (equity) out of the property. This refinance is designed to accomplish a specific goal: To reduce your client’s monthly payment, change the terms of the loan from an adjustable to a fixed rate or possibly from a 30 year to a 15 year or vice-versa, or possibly reduce the monthly payment and eliminate mortgage insurance-in some cases lower the monthly payment on mortgage insurance if it cannot be eliminated. For a rate and term refinance the answer to "should we refinance" is very easily answered with math, and brokers can walk through the numbers.
Orion has found that the most common refinance is a rate and term refinance from one 30-year fixed rate mortgage to a new 30-year fixed rate mortgage. For these types of transactions, walk your client through an intelligent decision. An important factor in this consideration is will your client’s monthly payment decrease by at least 5%. Also, what will be the total cost of the refinance divided by the monthly savings? Is it less than 3 years?
Cash-out refinances involve a different set of circumstances and therefore the decision is usually a bit more challenging. Why would someone take cash-out of their property? Perhaps the reason is to pay-off debt, gift money to a child, buy-out a partner in the property or a business, use for remodeling, or to obtain down payment money on a second home or income property. Our brokers have seen a myriad of reasons.
There really is no cut and dried answer to if your client should refinance. The math often provides the clearest answer, but some situations are more complicated than others. But tailoring a refinance to your borrower’s needs is exactly what Orion and our AEs excel at – just ask us!