Debunking refinance myths

Many mortgage borrowers have interest rates well above those available in today's market, but can't refinance profitably. One common reason is that their property values have declined to the point where a new loan would require mortgage insurance. A second reason is that they are self-employed and cannot meet the tough income-documentation requirements that now prevail. Still a third reason is that the borrower's credit score has either deteriorated or no longer meets the higher scores that are now required.

These borrowers face real problems for which there are no easy remedies.

Yet there is another group of borrowers who can refinance profitably in today's market, yet choose not to, for reasons that make no sense. Their barriers are self-inflicted. This article is about them.

"How long do I have to wait before I can refinance again? I was told a year."

Not so. I have never heard of a law, regulation or loan contract that establishes such a limit.

When home prices were rising, it was the practice not to reappraise a property on which the borrower had refinanced within the year. That may be where the notion of a one-year waiting period came from. You don't hear it in today's market, because with prices soft, lenders want a current appraisal.

Bottom line: There is no required waiting period on a refinance.

"We refinanced a year ago to a fixed-rate loan for 30 years at 6 percent. My loan officer just told me that he can give me a 5.375 percent rate with no closing costs. I'm tempted but I have already paid 11 months of the term and am reluctant to give that up."

You aren't giving up anything. What you accomplished in the 11 months is a reduction in the loan balance equal to the 11 principal payments you made. If you refinance, it will be on this lower balance, so your savings remain intact.

It is true that if you refinance into another 30-year loan, you will be staring at 360 new payments. Lenders won't write a loan with a term of 349 months. However, it is easy to stay on the same amortization track by making a small increase in your monthly payment.

For example, if you refinance a $100,000 balance into a new 30-year loan at 5.375 percent, your new payment is $559.98. To pay off in 349 months, increase the payment to $567.13, which I found using my calculator 2c. You might want to pay off even earlier by making the same payment at 5.375 percent that you were making at 6 percent. My calculator 2a will give you the payoff month if you do that.

Bottom line: You don't lose past principal payments when you refinance. ...CONTINUED

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