'My parents said I should refinance'

It’s pretty great that parents watch out for their kids’ finances. A 2015 first-time buyer was in touch because their parents told them to refinance right now, while rates are low. But is that a smart thing to do?

The purchase loan we did two years ago used the USDA program, which allows for no down payment under certain conditions. The family closed at a 3.625% interest rate with a few dollars of mortgage insurance, so their payment before taxes and insurance is something like $835 per month.

Mom and Dad are correct that interest rates are still pretty low. However, when we review the whole picture, we see there is always more to the story than “the rate”.

Since there was no down payment at the beginning of the loan, we’d need lots of market appreciation to do this new loan with no mortgage insurance. There is a way to structure without paying PMI monthly, so we plugged in those figures. The result is that the new monthly payment would save about $15 per month.

To boot, refinancing means we not only get to re-qualify every aspect of the loan, but there are closing costs to consider as well. Even though we would technically be removing PMI from the monthly payment in this case, the cost-benefit analysis suggests we don’t do it.

The other thing we played with is refinancing to a new 15-year term. Same issues apply regarding PMI, documentation, and closing costs. Instead, they could keep their current loan, whose terms are nothing to sneeze at, and pay an extra $475 or so per month to knock it out over the next 13 years. Have a look at past articles on my web site to see why that might not be such a great idea.

Point being: Don’t just chase the rate. Your mortgage is your largest debt and should be handled with respect. When you have the itch to change it up, be sure you are getting a complete and educated analysis with a proven professional to help your family make the right choices.

Tammy Engel is your local Mortgage Advisor. She’s been working for your best interest since 1990 for purchase, refinance, and reverse mortgage. Call 661/822-7325 for your personal, no-obligation consultation.

Tammy Engel is your local Mortgage Advisor and she’s been working for your best interest since 1990 for purchase, refinance, and reverse mortgage. Contact her at (661) 822-7325 for your personal, no-obligation consultation. NMLS #235051/303625