Mortgage rates are at two-year lows and continue to be significantly less than the historical average. With home values holding and/or increasing in most markets many homeowners are wondering if now might just be the perfect opportunity to refinance (read here). After all, last time this year many economists were predicting rates in the 5% range by the first of January. That didn’t happen; is it time to capitalize on these lows before rates start to climb?
When determining if it makes sense to refinance it is prudent to examine what the costs of refinancing are and weigh that against the monthly savings. An oft-quoted rule of thumb is to refinance if you get at least 1% off your rate. It’s a good starting point; but there may be times when it makes sense to refinance at a lower rate reduction or hold tight at a greater reduction.
There is a break-even point. If you will be in the home longer than the break-even, it technically makes sense. You should, however, be very cautious to extend your loan out over more years than are currently remaining. The longer the loan, the greater the interest you pay. So even though you may be saving monthly, you may end up paying tens of thousands more in interest over the life of the loan.
No cost refinance… at what cost?
There are mortgages touted as “no-cost”. These mortgages roll the costs into the rate you pay. There are always costs to refinancing; appraisals, title work fees, county and state recording fees and taxes and origination. Mortgages are a business and nothing is “free”, per se. Many people work to make a refinance happen. Understand what the costs would be if you paid the fees vs. if you roll them into the rate. Oftentimes the higher rate for the rolled-in fees is not worth it on homes that are less expensive or that you plan on staying in long term. Larger loans, however, are oftentimes good candidates for this strategy. That is because the total of the fees in proportion to the dollar size of the loan is smaller. A good mortgage broker in conjunction with White Oaks will help you strategically analyze if it makes sense for you. Also, don’t discount the time and effort it will take on your part to get together the necessary paperwork and have an appraisal done. Do not embark on refinancing unless you can devote a bit of time in the next 45-60 days to it.
But it’s going to cost you…
Refinances have costs including appraisal fees, origination fees, underwriting fees, title fees, recording fees, releasing fees and others. Luckily, consumers should receive a loan estimate (LE) that allows them to compare APR (a measure of both rate and fees) from lender to lender. By comparing APR a consumer is able to discern what is the best deal if the loan is held throughout the proposed life of the loan. A surprise fee can be a rate lock extension, which can be put into place if your loan doesn’t close by the rate’s expiration. Think of a rate lock like a hold. Your lender has put a “hold” on the money to finance your loan for a certain period of time. If you need longer, you will need to pay to retain your hold. Make sure your lender can deliver on the rate lock time frame you have and that you are doing everything necessary to supply documents promptly to ensure a timely close.
There are many costs associated with refinancing. If you move before you recoup those costs with a lower payment you have wasted time and money. Always run a break-even analysis to know how long you need to stay in the home for it to make sense.
Here today, more tomorrow?
Know that rates fluctuate all the time. When comparison shopping, compare on the same day. Feel out the person you are working with and make sure you are comfortable. A mortgage person who cannot deliver on their word can be more costly than .125% rate difference in the long run. Find someone you trust. Also, ask for additional discounts. Certain banks and credit unions offer discounts to their customers. See if you get anything for being in a union, the military, etc. It pays to ask the question; a small discount on a home loan adds up to some serious savings.
It is also prudent to look at refinancing and debt servicing like the ones at Reali as part of your holistic plan. There are tax implications and other strategic considerations. We are always happy to help you discern if it is the right path for you to refinance, now or in the future.