Refinancing

The numbers can be hard to ignore. With mortgage interest rates hovering around historic lows, it’s only natural for homeowners to look at their current loan terms and think about making a change. That prompts a natural question: is it time to refinance?

Jim Nichols hears that all the time in his role as chief retail officer at Prospect Bank, a financial cornerstone of Central Illinois since its founding in Edgar County in 1873. And his answer — well, it depends on just how long the homeowners are planning to stay in their current residence.

“There are several questions to ask when somebody wants to do a refinance, and the first one is, ‘How long are you going to be in this house?’ And sometimes you don’t really know the answer to that, because you can change jobs or your dream home comes on the market,” Nichols says. “But first of all, we want to ask that question. If they answer, ‘I’m going to be gone in a year,’ then it’s probably not going to make any sense.”

But to those who plan to be in their home for two or more years, refinancing can make a lot of sense, and add up to potentially several thousand dollars in savings. As of early June, the benchmark rate for 30-year mortgages was at 2.99 percent, with the Federal Reserve Bank recently pledging not to raise rates until at least 2023. For anyone who bought a home when rates were higher, refinancing is a real temptation — though certain conditions must be met first.

‘Sometimes, it’s a no-brainer’

“We look at what they’re paying now as far as their interest rate, and what they can save by doing a refinance, and then factor in the cost of doing a refinance and come up with a justification time,” Nichols says. “Typically, that’s a number of months — how many months is it going to take you of lower payment to justify the expense that it’s going to cost you to do the refinance? Once you provide that information to the consumer, at that point it’s really up to them to make the decision.”

Just like buying a home, refinancing can come with associated costs, such as application fees, title search fees and appraisal fees. There are also settlement fees paid to the attorney, title agent, or other professional authorized to oversee the process. Closing fees for a refinance can average between $3,000 and $5,000, depending on the size of the loan. But that’s money borrowers often make back thanks to the more favorable terms of the refinanced mortgage.

“What I always say to people is, ‘Take this information, bring it home and share it with your husband or wife, pour a glass of wine and talk about it,’” Nichols said. “There’s no need to make a rash decision. But sometimes, it’s a no brainer.”

Nichols recalls a client who dragged his feet on a potential refinance until he was told he could save $100,000 over the next eight years thanks to the more favorable rate. “He about fell out of his chair,” Nichols adds. “I think that got his attention.” Indeed, a refinance can mean serious savings especially for homeowners who bought a decade ago when rates ranged around 5 and 6 percent and intend to continue to live in their home.

Choosing the 15-year option

And it’s not a matter of trying to catch the mortgage market at its lowest possible point, Nichols adds. Even if rates tick up slightly — as they did in the spring of 2021 — they’re almost certainly still lower than the rate attached to a homeowner’s original mortgage loan.

“Somebody called me recently when rates ticked up and said, ‘Well, I think I missed my opportunity.’ I said, ‘Well before you think you have, tell me what your rate is right now.’ My point is, you haven’t missed your opportunity,” Nichols says. “You’re not going to get the bottom, you’re not going to get rates when they’re floored. But if you’re going to be in this house for at least than two years, refinancing is going to justify going through the hassle of doing it.”

There’s also money to potentially be saved in changing the number of years associated with the loan, given that 15-year fixed mortgages can come with rates that are markedly lower than those of 30-year fixed mortgages. That’s become a popular tactic for those who can afford the increased monthly payments and are planning to remain in their homes for the foreseeable future.

“You would not believe how many borrowers have refinanced from 30 to 15,” Nichols says. “It can be a significant payment swing at times, but this low-rate environment makes it a lot easier to justify going with a shorter term. Last year, a large portion of our business in refinance was when people were taking those 15-year mortgages. Sometimes, they were 2 percent. If they were paying 4 percent, and they’re going down to 2, they could justify the difference in payment.”

This is just one of the many ways that Prospect Bank helps consumers make the financial decisions that are right for them. Interested in exploring what a Prospect Bank refinance can do for you? Visit one of its nine locations across Central Illinois, including the main branch at 177 West Wood St. in Paris, call (877) 465-4154, or visit BankProspect.com for further information.

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