I am truly surprised when I read what are supposed to be reputable websites (no, I will not name names) that say homeowners with mortgage loans should not refinance until there is at least a 2 percent drop in the interest rate. This is nonsense! Every case is different, and the same standards should not be applied to every situation. Waiting for a 2 percent decrease in the interest rate may take years! During this time, you will be stuck with a higher payment waiting for a lower rate that may never materialize.
Let’s look at three scenarios in which I will use numbers to make my point.
Let’s assume that the mortgage loan that you took out last year for $250,000 carries an interest rate of 4.5 percent. Your monthly payment – principal and interest combined – is $1,267. Let’s also assume that you are able to refinance at 3.5 percent, lowering your monthly payment to $1,123. That’s a savings of $144 per month. Let’s further assume that your closing costs to refinance are about $2,300. That means your break-even point is 16 months, after which you will start saving money on your refinance. And if you multiply the $144 monthly savings by 30 years, that could make a nice addition to your retirement.
Let’s say you take a granular approach to the refinancing process and think: “But I already paid for a year! I start paying from the beginning of the loan.” Yes, you do, unless you obtain a 29-year loan, since you already paid for a year. But most borrowers, when they refinance, start the loan clock again at 30 years. Again, let’s look at the numbers. Your original payment at the initial, higher interest rate will result in a total interest and principal repayment of $456,120. Your new payment at the lower, refinanced rate for 30 years will result in total repayment of $404,280. If it costs $2,300 to refinance and obtain a lower rate, then you will save $49,540 over the life of your loan! That’s why it makes sense to refinance – even when the interest rate drops by less than 2 percent. (In this example, it’s a 1 percent decrease.)
A short digression: When I started in this business 30 years ago, and up to about 2009, refinancing expenses were typically half of what they are today. This is because over time, the government, in its infinite wisdom, put regulations in place following the beginning of the Great Recession to protect mortgage-loan consumers from unscrupulous lenders. However, this has resulted in an approximate doubling of closing costs. The standard appraisal that used to cost $250 is now $450. Likewise, bank fees (for underwriting, administration, etc.) are much higher due to greater compliance requirements, title expenses have risen (they are sky high on home purchases, but that’s another story) and credit reports cost more. That is to say, virtually every expense associated with mortgage loans has increased significantly.
Let’s assume that you are getting close to retirement age or that you are making much more money than you did when you obtained your original mortgage loan. In this case, it makes perfect sense to refinance from a 30-year fixed loan to a 15-year fixed loan. Again, let’s look at the numbers. In our first scenario, you took out a 30-year loan a year ago at 4.5 percent and have 29 years remaining. Let’s assume that you can get a rate of 3.25 percent for 15 years. Your monthly payment will be $1,757, which is significantly higher than the $1,267 a month you were paying under the original rate. But let’s go a step further. At the original rate of 4.5 percent, you will pay a total of $440,916 over the next 29 years. However, if you refinance for 15 years at the lower rate of 3.25 percent, your total repayment will be $316,260. Now we are talking real money – a six-figure total savings of $124,656! If you can afford a higher monthly payment over a shorter term without hardship, then go for it! You will be more than happy with your savings over 15 years.
Many brokers advertise “no-closing-cost refinancing.” But such “deals” mostly likely will cost you in one of two ways: either by increasing your loan balance, and you will pay interest on that balance for the remainder of the loan term; or the lender will offer a slightly higher interest rate in order to offset your closing costs from the premium received on that particular rate. However, if you are not willing or able to bring any money to close a refinance loan but still want to take advantage of a rate that is lower than that of your original loan, this option may work for you. But keep in mind that there is no free lunch. Your closing costs need to come from somewhere, and you will end up paying for them one way or another.
I dated myself when I said that I started in this business 30 years ago, but the flip side is that I have gained much experience in and knowledge about the field in my long career as a mortgage broker. Veterans of the mortgage business like me have seen it all: recessions, the Great Recession, economic booms and pseudo-booms. We have witnessed the enactment of myriad regulations that have driven costs way up, and interest rates rising to double-digits (hard to imagine by today’s standards). This roller-coaster ride of sorts serves to impose a feast-or-famine mentality on our industry, and I have dramatized this phenomenon in a play I wrote titled “Requiem for Greed,” which is posted on YouTube.
The bottom line is: Call us at An Opportune, Inc. when you need a mortgage loan or are looking to refinance. We have seen it all – and we are on your side!