By Randy Neumann
Recently, two of my clients told me they were having trouble refinancing their mortgage through their bank. Most people view a bank, especially a large one (of which there are very few today), as “the” place to fill all their borrowing needs. I learned that this was not necessarily so when I was the branch manager of Garden State National Bank in my hometown of Cliffside Park.
When I was new to the game, I would send a mortgage application from a bank customer, who was often a friend (Cliffside Park is a small town), to the mortgage department. More often than not, the mortgage was declined or offered at a less than competitive rate. I inquired as to why this was happening and I was told, “The bank was not looking to increase its mortgage portfolio at this time.” Although I was disappointed when I was not able to fill my customer’s need, I understood the bank’s position.
That was 32 years ago, and things have not changed all that much. If banks want mortgages in their portfolio, they will make an attractive offer, but if they don’t, they won’t. Additionally, unless you took a Rip Van Winkle snooze over the past several years, you are aware that very few banks are aggressively pursuing mortgages these days.
Why not?
Not too long ago, banks and other mortgage lenders were making irresponsible loans, at the government’s urging, to people who could not afford to pay them back. They were making no-doc (industry jargon for no documentation of income) loans. They were financing 100% of the cost of a house to people who were planning to “flip” the property in a few years when the price doubled.
People were critical of my projected 3% annual value increase of homes – as stated in my financial plans – telling me proudly, “My house increased by 20% last year!” My response was, “Maybe so, but it won’t always be that way.”
Well, things have changed a bit, haven’t they? Lenders today are back to the old rule of thumb requiring 20% down on a home. Through a strict verification process, they also make sure you have the income to pay off the loan. They don’t care if you have assets sufficient to purchase the house; they know you can spend down those assets on anything you want, so these may not always be available to pay off the mortgage. They are more interested in your annual income.
But despite all this, thanks to Uncle Sam’s largesse, mortgage interest rates are low, so it’s a good time to refinance, if you can. I referred the couple who had trouble getting a loan through their bank to a loan officer in Paramus.
This was not your run-of-the-mill homeowner’s refinance because it involved two properties – a home in Bergen County and a condo “down the shore” – and a line of credit on the home. The mortgage on the home was $270,000 at a rate of 5.375% for 15 years. The shore condo had a loan of $624,000 at 6.75%. It was interest only, and it had a seven-year balloon (industry jargon that means the loan must be paid or refinanced in seven years).
The new mortgages were for 30 years at 4.25%.
I ran a comparison of the old and the new scenarios. There were striking differences between the two. On the cash-flow projection, there was an annual savings of $22,020 between the old and the new. Actually, the cash savings of the new plan over the old was over $25,000, but the clients lost $3,000 in income tax savings because their mortgage deduction was much lower.
On the balance sheet, liabilities were much larger in the new versus the old because the mortgage on the home had been paid down considerably, but, oh well, we’re leaving that to the next generation. Another benefit of the new program was that the clients were no longer facing a payoff of the $624,000 mortgage or a refinance at who knows what rate in seven years!
So, the moral of the story is, if refinancing makes sense – do it. And, be sure to shop around for the best deal.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for the individual. Randy Neumann CFP® is a registered representative with securities and insurance offered through LPL Financial. Member FINRA/SIPC. He can be reached at 12 Route 17N, Suite 115, Paramus, 201-291-9000.
