Variables in Play to Refinance

If you're considering taking advantage of the current low-interest-rate environment to refinance your home, then one large consideration is the intended time horizon in your current residence.

Although everyone’s financial circumstances are different, it may be well worth it currently to pursue refinancing your mortgage given the low-interest-rate environment. Although it is not always in your best interest to refinance, if you have not refinanced your home in the last 18 months or so, I would strongly recommend looking into it and shopping around with local and national lenders.

One large consideration is your intended time horizon in your current residence. Although most of what you read would recommend that you take advantage of the low rates and lock in for the long-term at fixed rates, an adjustable rate may still make sense for you.

A 5/1 Adjustable Rate Mortgage (ARM) or 7/1 ARM are almost always lower rates. If you plan to sell to either upgrade, downsize or for a certain move in the next five years or so, an ARM is probably a perfect fit for you. Even if you end up staying in the home for a year or two beyond the fixed portion of your loan, most terms of ARMs only allow for the loan to readjust up to a maximum of 1% annually, so it would take a few years beyond the initial five or seven years for the loan to get considerably higher and out of favor.

A good independent financial professional should be able to help compare and contrast different options. The variables in play are: interest rate; time intended to hold a property; private mortgage insurance (PMI), if any; and closing costs.

When PMI is involved — usually for not having 20% equity in a property (although most physician-specific mortgage programs waive PMI) — you need to map out how long it will take to get 20% equity. This is not a simple calculation: you need to look up the loan amortization schedule of your loan, which shows the ratio of how much of your monthly payment will go towards Principal vs. Interest.

The start of a mortgage is very front loaded with interest and, therefore, when you are a fifth of the way through your scheduled payments, you will not have 20% equity built in yet. PMI dropping off is trickier to factor in. A normal 30-year fixed loan takes almost 10 years to build the initial 20% equity, according to Bankrate.com.

Current Average Rates (Source: Yahoo! Finance):

30-year fixed: 3.52%

30-year fixed jumbo (more than $417,000): 3.94%

15-year fixed: 2.77%

5/1 ARM: 2.8%

Depending on your time horizon and the size of the mortgage for the respective property, it may be that it would make financial sense to refinance to gain even just a fraction of a percent.

Jon C. Ylinen is a financial advisor with North Star Resource Group and offers securities and investment advisory services through CRI Securities, LLC, and Securian Financial Services, Inc., Members FINRA/SIPC. CRI Securities, LLC, is affiliated with Securian Financial Services, Inc. and North Star Resource Group. North Star Resource group is not affiliated with Securian Financial Services, Inc. but is independently owned and operated. The answers provided are general in nature and are not intended to be specific recommendations. Please consult a financial professional for specific advice in relation to your individual circumstances. This should not be considered as tax, legal or mortgage advice. Please consult a tax, legal or mortgage professional for information regarding your specific situation. 631103/ DOFU 03-2013