FINANCIAL HEALTH: When, why should you refinance?

There have been few positive aspects to the COVID-19 pandemic, but one piece of good news for homeowners is the reduction in market interest rates. Many folks have elected to refinance their mortgage at a time when the rates have reached as low as 2.5%.

Refinancing your mortgage basically means that you are trading in your old mortgage for a new one — and possibly a new balance. When you refinance your mortgage, your bank or lender pays off your old mortgage with the new one.

Homeowners might refinance to take advantage of lower market interest rates, cash out a portion of their equity or reduce their monthly payment with a longer repayment term.

Ralph DiSciullo, owner and branch manager of American Financial Network, in Winter Garden, has been a lender for seven years.

As a direct lender, DiSciullo essentially eliminates the middle man — the mortgage broker who connects the clients with the lenders.

“Seven, eight, nine years ago, banks got real strict on why they can lend to,” he said. “We have banks calling us — they can’t handle the client because of (a number of) reasons, maybe poor credit.”

A person’s credit score is an important factor in determining the interest rate of the loan he or she is able to obtain based on their “creditworthiness.”

“A good credit score is anything over 750,” DiSciullo said. “Between 650 and 750 is average. Banks won’t usually touch anyone under 640, but I will go down to a 500 credit score. … I won’t tell you no, I’ll show you the path to take to be able to refinance your home.”

He said homeowners save more money if they can decrease the interest rate by a whole percentage point. This savings can be poured back into the life of the loan to reduce monthly payments, it can be used to make renovations to the home or install a pool, or it can help pay off high-interest credit card bills.

Six months ago, people could obtain an interest rate of 2.5% to 2.75%; however, inflation has caused that percentage rate to climb to between 3% and 4% since the first part of the year.

But that still passes on quite a savings to homeowners.

One of the downsides of refinancing is that it costs money to take out a new mortgage to pay off the old one. The homeowners will pay the same costs as when they first bought the house, including title insurance as well as origination, application and closing fees.

Experts recommend against refinancing if homeowners don’t plan to stay in their home long because they will end up spending more than they save. It’s important to calculate the break-even point on these costs and find out exactly when one begins reaping the benefits of the lower interest rate. In some cases, it could take two or three years.

DiSciullo said anyone considering a refinance should do their research and ask questions before deciding who will handle the transaction. Find out if you are dealing with a broker or direct lender, learn what kind of interest rates the company has and ask about closing costs.

Homeowners with high credit card balances could benefit from refinancing.

“Say someone is paying 20% interest on their credit card; now they’re paying 3%, so there’s a significant savings there,” DiSciullo said. “It’s working the numbers.”

Refinancing a mortgage and combining debt — such as credit cards or vehicle and student loans — could result in a monthly payment increase of $600, but if it reduces $600 in monthly payments that have a high percentage rate, it actually produces in a significant savings.

DiSciullo recently helped a woman save $600 a month by recalculating and refinancing her $40,000 in student loans.

“Cash is king,” DiSciullo said. “If I can put an extra $1,000 in your pocket but only raise your payment $100, it’s a win-win situation.”