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Now's the Time to Refinance


With current rates at historic lows, people are able to lock in a shorter-term loan and still end up with monthly payments equal to or less than what they were paying with a longer-term mortgage.

If you are a homeowner, now may be an opportune time to refinance. Over the last month, interest rates have continued to drop and remain at historic lows. Banks are also offering some extremely favorable loan terms, including credits that can be used toward your escrow and adjustable loans with favorable caps that lower the risk should rates rise sharply over the next few years.

To give you an idea, below are some examples of rates and terms that we have seen in the past month:

A 30-year fixed mortgage: 3.250% to 3.5%

A 15-year fixed mortgage: 2.75% with zero closing costs and $648 credit toward escrow

A 5/5 ARM at 2.875% with a 7.875% cap

A typical rule of thumb is that if interest rates are 1% to 2% lower than your current rate, it’s worthwhile to consider refinancing. And with current rates as low as they are, we are finding that some clients have been able to lock in a shorter-term loan and still end up with a monthly payment that is at par — and sometimes even lower — with what they were originally paying with a longer-term mortgage.

Still, anyone who has refinanced at least once would agree that it’s not a simple process; low rates alone may not be enough to justify the hassle of document collecting and endless phone calls.

It’s important to find a good broker who can not only solicit the best rates, but who also has a reputation for follow-through and responsiveness. Even with a good broker, you must be pro-active and make sure your documents are in good order, and that you contact the lender regularly to ensure the process is moving along. With such low rates, the number of refinancings has skyrocketed and some homeowners we work with have been frustrated by long waiting periods and brokers who seemed to have dropped the ball.

If you are thinking about refinancing, you may also want to consider other creative financial planning strategies that take advantage of this low interest rate environment. For example, if you have adult children who owe money through a student loan or a high-interest-bearing credit card, you might consider a cash-out refinance (or straight refinance) and offer to pay off their debt using those funds.

The result could be a win-win: Your children pay you back at a much lower interest rate, rather that at the 5% to 6% rate they are likely paying on their original loans; you benefit by transferring a portion of your wealth without gift tax implications and being able to deduct the mortgage interest on your tax return. This strategy, however, may have other consequences to your long-term objectives so it’s best to consult your financial advisor further if it is something you are considering.

Finally, it also may be worthwhile to look into whether or not you qualify for the Home Affordable Refinance Program (HARP), which has been extended through 2013. Established in 2009, the program provides homeowners the option to refinance mortgages that are “under water,” (meaning the current market value of the home is less than the current loan amount or has negative equity). To be eligible, the existing loan must have been acquired by Fannie Mae or Freddie Mac before June 1, 2009.

Disclosure language for column:

Tom Orecchio is a principal and wealth manager with Modera Wealth Management, LLC (“Modera”). Nothing contained in this blog should be construed as personalized investment, financial planning, legal, tax, accounting or other advice, and there is no guarantee that the views and opinions expressed herein will come to pass. Investing involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be construed as a solicitation to buy or sell any security or engage in any particular investment strategy.

For more information about Modera, including our registration status, fees and services and/or a copy of our Form ADV Disclosure Brochure, please refer to the Investment Adviser Public Disclosure web site at

, visit our web site at

or contact us at (201) 768-4600.

A full description of the firm’s business operations and service offerings is contained in our Disclosure Brochure which appears as Part 2A of Form ADV.


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