When talking to my loyal mortgage clients in Flower Mound and Frisco, they usually ask me when the best time to refinance their home is. The obvious answer to that requires careful calculating of savings versus costs over the expected time in the loan. In this post on the other hand, I want to bring up another very important variable involved in the consideration process of refinancing that has to do with property taxes. There are a number of types and ways to refinance, and this is relevant in all of them.
So, when is the best time to refinance?
If the change in rate or shortening the number of years in which you are refinancing is all worth it, you might REALLY think about refinancing in the early months of the year, like January through March because your property taxes will have been paid. The reason this is significant has to do with how a refinance is set up. When you are paying your taxes and insurance in your monthly payment, along with your principle and interest, you are what is called, escrowing. Wiki defines escrow as “It is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage)”. When you escrow, your lender will require you to have 2-3 months of taxes and insurance in your escrow account as a padding to protect you in case your taxes and insurance costs go up…and they will. If you are refinancing for example, in June, they’ll also want to collect up front, January through June taxes, because they will need to have that amount in there for when your taxes are due. In that example, you will be making a monthly payment toward those taxes from July through December, so when your property taxes are billed, you’ll have the entire years worth in there. Why is this significant when refinancing? If you do not choose to pay that escrow setup out of pocket, then you will have to roll this into your new loan, along with the fees associated with the loan. This means, you’ll increase your new loan and end up paying interest on your new escrow account for the duration of your new loan. When you refinance in the early months of the year though, you only have to put in the padding of 2-3 months, and maybe 1 or 2 months, because you’ll be making the monthly payment to compensate for the rest of the year. Make sense? On a $200,000 home, taxes average about $383 a month, so if you were refinancing toward the end of the month, say September, you would have 3 months of padding/reserves, and then Jan-Sept (9 months). That is 12 total months total between padding and remainder of the year, and at $383 per month, that is $4,600. You can see how that adds up pretty fast.
If you are looking for the safest lender with some of the best rates and fees in the industry, give me a call or email me…Brad Lynch aka Your Mortgage Guy For Life. You can get my number and email by clicking on the Contact Us tab at the top of this page. Contact Flower Mound and Frisco Mortgage.