Re-finance Twice or Three Times If the Numbers Work
by William H. Sloan on 16/11/11 at 5:22 pm
With the all-time lows in interest rates, I have seen people re-finance their houses two or even three times in a short period of time to take advantage of even lower interest rates. Many clients have asked me if this is a good idea. Most often, at least here in South Carolina, the answer is yes as long as the math works.
I cannot speak for all states, but I can speak for my state of South Carolina and my favorite lender, I-Freedom, Direct out of Salt Lake City, Utah. We have done closings for them for over two years. Over that time, the really low interest rates have gone from really low to an all-time low. Someone can get a 30 year mortgage for 4% APR and a 15 year mortgage for even lower. People we have done closings for in 2009 said “I will never see you again unless the rates drop even further.” Guess what? I see them again. So many clients we closed out in 2009 did it again in 2010 and then are doing it again in 2011.
In some of the closings I have done for people the second (or third) time, the benefits of doing the re-finance are not as obvious as someone, for example, going from 10% to 5% or from an adjustable rate to a fixed, or 30 year to a 15 year. These repeat closers ask me and their loan officer whether it makes sense for them to do the re-finance. If the client will save money in interest in the long term, then pay the closing costs in the short term and re-finance again.
A closing I did last week is a good example. The woman was cutting her interest rate just half a point and her payment was only going down $25 a month. She was hoping her payment would go down $50 a month. She was hardly paying any closing costs; the lender was paying all the costs and I reduced my attorney fee since she was a repeat client. There are two great things about South Carolina law which make me feel good about situations like this. First, South Carolina law requires that an independent attorney supervise a real estate closing, including a re-finance and that the borrower, not the lender, pick the attorney to have them explain the documents. (SC Code of Laws, §37-10-102). State v. Buyers Service Co., Inc., 292 S.C. 426, 357 S.E.2d 15 (1987).
In addition, South Carolina passed a stiff Predatory Lending Law in 2003 (http://www.scstatehouse.gov/sess115_2003-2004/bills/438.htm) which requires a lender to show a net tangible benefit to a borrower who is re-financing the debt on his house. I am a math guy. With The Predatory Lending Act, I-Freedom has a document in the closing package where I can show the borrower(s) how many months it will take them to recoup the closing costs with lower interest payments. In this case, the woman in question would need 26 months to recover the closing costs in less interest. I asked her if she would be selling her house in the next 26 months. She said no. Therefore, it made sense for her to proceed with the transaction since she would save about $90,000 in less interest over a 30 year period.
This client and other clients also enjoy other short-term benefits to the re-finances. They can write off what little closing costs she had on her income taxes next year. When someone re-finances, they also get to skip a month in payments. This woman could use that money for other expenses or use that money to make a principal-only payment and save even more interest over the life of the loan.
Of course, each person’s situation is unique and two recent re-finances in a short time will not be the best thing for everyone. However, in the loans I have seen, almost all of them are good ideas for my borrower-clients.
Bill Sloan is an attorney in South Carolina that handles re-finance transactions. He can be reached on the internet at sloanlawfirm.net.
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