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Bill Wright at PAR East Mortgage Company in Southampton. DANA SHAW
Mortgage interest rates have been low for four or five years now, but since the pandemic began they have plummeted so low that it makes sense for nearly everyone on the South Fork with a mortgage to refinance, according to Bill Wright, a partner at PAR East Mortgage Company in Southampton.
Considering home prices and loan values on the East End, he said it makes sense to refinance to a lower rate whenever rates have fallen by 1 percentage point below a current mortgage rate. The savings will be several hundred dollars a month in most cases, which means the costs of refinancing, such as taxes and fees, will be recouped in a year or so.
And with rates as low as they are, many borrowers are opting for cash-out refinancing, using the equity in their homes to put in pools or finance other home improvements to make life more comfortable during the pandemic.
Homeowners with Federal Housing Administration, or FHA, loans and anyone else who is paying for private mortgage insurance, known as PMI, can experience even greater savings.
Mr. Wright recently spoke to the Express News Group to explain what homeowners should know about refinancing and when it is the right move for them. This Q&A has been edited for length and clarity.
Where are the interest rates at now to refinance a mortgage, compared to how they’ve been historically?
Right now, we are probably at the bottom of the barrel — the lowest they’ve been. … You can get a 30-year fixed in the mid-2s now.
So, how do I know if it’s going to be worth it to refinance my mortgage, or if I’m not actually going to save any money by doing it?
Let’s put this climate to the side for a second. So, generally, the rule of thumb is that if you can reduce your interest rate by one full point, it’s definitely worth it. In this climate, it’s pretty much worth everyone doing it — because the bottom line is that everyone was anywhere between the low 4s and high 3s, and we’re reducing them now down into the 2s.
In this environment and what’s going on right now, it pretty much benefits almost 95 percent of people to do a refinance. And what we’re finding is that people who were on a 30-year fixed, they could go down to a 25- or 20-year at a lower rate, and have the same payment as what they currently had on a 30-year fixed. So, it makes a significant difference in the overall savings picture.
How much money is it going to cost me to refinance my mortgage?
It depends on the loan amount, and you have to pay New York State tax and your title charges, and an appraisal if you need one. So it’s a couple of grand. And you have to factor that into the overall savings and how long it will take you to recoup the closing costs versus the monthly savings. Typically, if you can recoup your closing costs within one year, and if you plan on staying in the house, it makes sense.
You could recoup your closing costs in as soon as one year?
A year, year and a half, depending on the savings. Some people are saving $400, $500, $600 a month. Many people saving right now bought their homes two years ago with 10 percent down — an FHA loan first-time homebuyer kind of thing. So they had PMI. But because of the environment that we’re in, out here, home values have skyrocketed. So they’re able to refinance and get themselves out of a PMI loan, and into a conventional loan.
So, in those cases, they’re saving, like, $600, $700 a month between reducing the rate and getting rid of the PMI.
What is PMI, and why does my home value going up get rid of PMI?
It means that you didn’t put 20 percent down. You put anywhere between 3.5 to 19 percent down. So, if that’s the case, the bank’s going to charge you a fee: It’s PMI, private mortgage insurance. It protects them if you default.
Now, most people who only put 10 percent down when they buy a house, they don’t really have much equity. It takes maybe four or five years to build up equity to refinance and get out of paying PMI. That requires having 20 percent worth of equity.
But with what’s going on in our lives right now and the way the world is with home values and everyone coming out and buying, it’s increasing everyone’s home value — which allows them to refinance and get out of PMI sooner. Now, their loan-to-value is 80 percent or less, based on the home equity value.
Does PMI usually last for the life of the loan if you don’t refinance?
So, there’s two ways. They changed the laws so if you go conventional — conventional means it’s a minimum of 5 percent down — PMI will go away once you reach 20 percent equity, so probably about 11 to 12 years. If you go FHA, which is 3.5 percent down, FHA PMI lasts the life of the loan. You either have to refinance the loan or keep the PMI forever.
Does it make more sense to refinance to a 15-year loan rather than a 30-year loan?
Absolutely — but it’s a cash flow thing. Most of the house values out here and the loans, those are big numbers. You go from a 30 to a 15, that’s significant. So typically what we do is we tell our first-time homebuyers if you take a 30, make one extra payment a year. That will do significant damage to your overall interest throughout the life of the loan, and you won’t be strapped. The 15[-year] payment is very significant, but if you can afford it, it’s a great deal. I like the 20-year. The 20-year is my favorite. … You’re paying your loan off faster, and you’re saving 10 years or interest, versus the 30. The payment between the 20 and a 30, it’s really not that significant a difference.
Do you get a more favorable interest rate if you go for a 20?
No. The 20 and the 30 are about the same. You get a more favorable interest rate if you go for a 15.
Have things changed enough in just one year that it makes sense for people to refinance just one year after purchasing?
Yes — just look at the numbers now, look at the rates. There was a big purchase loan boom, and now it’s rolled into refis. And we’re seeing, with the pandemic, people are spending more time in their homes. So they’re doing a cash-out refi, pulling cash out, and they’re doing the work to improve their home to have a better living space: pools — half the world put in a pool this year— movie theaters, or finish the basement, just so they have more living space because people are spending more time in their homes and every day.
Are interest rates going to go up anytime soon?
Yes, not significantly, but we’ve seen in the last two weeks rates have ticked up a little bit. Two months ago, it would probably have been, like, an eighth to a quarter [point] lower.
Does that all depend on the Federal Reserve rate?
It depends on the Federal Reserve rate, and it also depends on what’s going on in the stock market, and what’s going on in the world. Bad things that happen in the world tend to be good things for interest rates — they go down.
If somebody wants to get prepared to ask their banker about refinancing, what information should they gather up first?
For a refinance, we would ask for financial documents: last two years’ tax returns, W-2s. If you’re self-employed, we would ask for proof of self-employment. We’d also ask for a copy of your mortgage statement, and then we would just do an application and run it to make sure that your debt-to-income ratio can cover the refinance.
And then we go from there. A refinance is a very simple process.
Is it easy to get the appraisal fee waived?
On a cash-out refi, you typically don’t get the appraisal waived — the banks want an appraisal. But we’ve been finding that we’re able to get the appraisals waived just on a regular rate and term refinance. We pay out the old mortgage, cover the closing costs, and be done.
We’ve been finding that based on loan-to-values, if you have a lot of equity, they probably will waive the appraisal fee. If you’re marginal, that might trigger an appraisal.
Does it make sense to pay for points while refinancing?
I typically don’t advise people to pay any points. The spread between paying the point and dropping the rate is really not significant enough once you crunch the numbers. Sometimes it works, but for the most part, the rate is not dropped low enough to where the cost of the point makes sense.
