The Anatomy of Refinancing
Beginning about December 1, 2008, historically low interest rates have resulted in an unprecedented rush (ongoing) to refinance. In fact, Wells Fargo recently re-estimated the aggregate loan volume for 2009 from $1.3 trillion to between $2.7 trillion and $3.5 trillion, mostly due to the ongoing rush to refinance! VR SAM® has continued to encourage their clients and national audience to seriously consider refinancing, and more specifically, consider their VA options.
So does a refinance pay off? Does it make sense for you? What should you consider? Here is what I call “The anatomy of a Refinance” which is offered in the form of an example.
Our hypothetical family has the following loan:
VA loan: Balance: $300,000; 30 year fixed, 6.5%, appraised value of $350,000
Principal and Interest payment: $1896.20 (taxes / insurance / HOA are constants and not considered)
Following a “Streamline Refinance”
New VA loan Balance: $306,525 (settlement costs rolled into loan- see breakout below), 30 year fixed, 5%
New Principal & Interest payments: $1645.49 (Net increase of $250.71 cash flow to family)
Settlement and lender costs:
*Title insurance $1100
*Escrow Account (insurance/taxes) $1794
(note: most owners will receive a return of previous loan’s escrow to offset this cost)
*State/county deed stamps (variesbystate) $1016 (note: in some states this fee is waived when refinancing with the same lender)
*Recording Fee $75
*Underwriting Fee $615
*Processing Fee $400
*VA Funding Fee (1/2% of loan amount) $1525 (note: waived for vets with any degree of disability)
It is important to again reemphasize that many lenders will not require an appraisal for a streamline VA refinance, which means that owners may not have to contend with the consequences of a declining market!
Analysis: From a pure cash flow perspective, the settlement costs of $6525 are recouped in 26 months.
Since some of these costs may not apply, the pay back is likely sooner by several months.
Analysis: Assuming the $250.71 monthly cash flow increase is applied directly to principal
Loan will be paid off in 270 months vs. 360 months.
This equates to a $81,854.00 interest savings over the life of the loan.
Not planning to stay in your home 20 years? At the end of 10 years, the owners have saved $8845 in interest AND reduced the balance to $210,403.
Analysis: Assuming the $250.71 monthly cash flow increase is NOT applied directly to the principal and owners remain in home for 10 years. The owners have still saved $30,085 in interest!
Everyone’s situation is different. If you would like for me to analyze how a refinance could work for you, just call or email!