Ask the Readers: When Does It Make Sense to Refinance a Mortgage?
Published on - December 19th, 2008 (Modified on - August 21st, 2009) (by J.D. Roth) 
So much for vacation. I just can’t keep myself away from you guys!
While surfing around this evening, I found a story at USA Today about how mortgages are at a 37-year low. A 30-year fixed-rate mortgage averages about 5.28% right now.
I don’t usually pay much attention to these stories. We refinanced our first house (from a 9% 30-year loan to a 5.75% 15-year loan), but our current mortgage is in a kind of phantom zone: We have a $207,000 balance at 6.25%, with about 25 years remaining. We think our home is worth about $350,000 ($333,500 according to Zillow), even after the wild swings in housing prices over the past few years.
The USA Today article piqued my curiosity, so I jumped over to Bankrate to see what sorts of loans were available. The site gave me three options:
The best option would give us a 5.00% rate and a monthly payment of $1111. (Our current monthly payment — principal and interest only — is $1386.60.) We could conceivably save $275 per month by re-financing.
But then I noticed an ad for a company called AmeriSave. It touted rates as low as 4.25%. A 4.25% 30-year mortgage? My jaw dropped. Literally. Could this be real? I clicked over, filled out the initial form, and took a gander at the rates they offered:
A payment of $1018 per month? That’s $378 less than we’re paying now! Yes, I do see the $6634 in fees and points. Yes, I understand that it will take us 18 months to recover these costs. That’s fine. We still plan to live in this house forever (or until we can afford to relocate to Wells, England).
So, my book proposal is on hold for a day. I’m spending my Friday digging into mortgages. I have several tasks on my agenda:
- I’m going to call AmeriSave to find out more about their rates.
- I’m going to call my current mortgage company to see what sort of rate they can offer.
- I’ll go through the process at MoneyRates.
- I’ve e-mailed my mortgage broker to see what he can do for me. (And he replied almost immediately — at 10pm on a Thursday!)
It seems strange to be devoting a day to this when it hadn’t even been on my radar until an hour ago. But it’s moves like this that can save big bucks in the long run. In All Your Worth, Elizabeth Warren encourages readers to “count the dollars, not the pennies”. When you make smart choices on the big expenses, you have more freedom to spend what you want on the small expenses. By refinancing, I’m trying to count the dollars. (When we refinanced our first house, we were able to keep the same payment, but cut the term from 26 years to 15 years.)
Meanwhile, Jason B. wrote in yesterday with a story about his efforts to refinance in this crazy market:
I’m refinancing my mortgage from 6.375% to something lower. I originally locked in my rate at 5.25% just in case it went higher. But the rate dropped to 5.0%.
I realized my $300 application fee was less than what I’d save in just 9 months of interest at the lower rate, so I called up and they agreed to keep my application open, charge an extra application fee (instead of starting over with all the paperwork) and lower my rate. But now the rate has dropped to 4.875% and could go even lower! I guess I’ll just keep paying the $300 until the rate still drops. But it feels wasteful.
Have you refinanced your home in the past few years? What advice can you offer us? It’s been a decade since Kris and I did this. Have you used Lending Tree? AmeriSave? What can we do to make the smartest decision? And do you have any advice for Jason? What should he do about rates that keep falling?
For research, I dug up an old post where Nickel shares his thoughts about how to decide when to refinance your mortgage.
This article is about Ask the Readers, House and Home
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For Jason: It sounds like you are still on the 6.375% mortgage. If that’s the case you need to take into account the extra interest you are paying now. Whether it’s worth holding on, depends on how big your balance is I guess and how low you think interest rates are likely to go.
For JD: Would you qualify for the mortgage? I wouldn’t get one as lending is very tight in the UK, I think both my house equity and credit score are too low. In normal markets, refinancing is commonplace in the UK and I wouldn’t give it much of a second thought. When I bought my house I anticipated refinancing every 2 to 3 years in any case – I think of it much like switching savings accounts.
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If you can afford your current payment, I would advise against switching from a 15- to a 30-year mortgage. Calculate what the total interest is you’ll pay over the 15 years and over the 30 years to see how much money you’ll save sticking with what you already have.
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I refinanced my house 6 months ago when it looks like rates had dropped as far as they could. Now it looks like I should have held out a little longer. I ended up going from a 6.75% to a 5.5% FHA 30 year fixed. Still a good move on my part, but I could’ve saved even more by waiting. Surely this is rock bottom for rates this time.
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The Fed has been cutting rates to encourage people to borrow for a while now. This was part of the reason we got into the whole credit mess we’re in now.
I don’t think this is a case where trying to fight fire with fire will work.
Since most lenders one way or another pass off the mortgages they originate, they make a lot of their revenue from origination fees. Seems like the Fed is giving banks money to lend to help them increase revenue because the market for mortgage related investments has dropped.
This does however create a good market for those that want to reduce their current mortgage’s interest rate.
But don’t just consider refinancing as the only option. Call up your current lender directly and tell them you’re planning to refinance into a lower rate and ask them what they can do for you. Be persistent and try to talk to different people if necessary. Feel free to mention you don’t mind paying some sort of fee since you would be paying a fee to refinance anyway.
No need to go through a broker and you can save some money too by going direct. If you have a good history with your current lender, they might just want to try and keep you.
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ReFi when you have the means to do so. If you are in an ARM, make sure you are prepared to ReFi before the teaser rate expires.
The best thing to do is always lock yourself into a 30 year fixed rate, it might be worth it to ReFi if rates drop 200 bips from your current rate. But depending on your balance, even that might not be worth it.
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What are closing costs, though? And how long will it take you to recoup those costs?
Here’s Clark Howard’s refinancing guide:
http://clarkhoward.com/shownotes/category/4/125/135/394/
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Great timing on this post. I was just on the phone with a mortgage broker yesterday discussing rates.
We haven’t run any ‘official’ numbers, but based on our conversation we are likely to only save about $120 a month. Our problem is that our home value has dropped too much (Tucson, AZ) and we would have to pay mortgage insurance, something we don’t have to do now.
If I was saving $200 – $300 (and planned to be in the house at least 5 years) I would refinance ASAP.
Personally, I suspect we will see even lower rates soon and I’m going to probably hold off a little and hope we see some improvement in our home value before I make a decision.
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I ran the numbers:
Current: 150 months, $91K in interest = $308K total.
Aimloan: 136 months, $64K in interest, $2K in fees = $273K
Amerisave, plan 1: 130 months, $52K in interest, $6K in fees = $265K
The difference between each Amerisave plan is about $1K-$1.5K for each plan, adding a month each time.
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I wonder how much of this is preventative measures in case the govt. steps in and lowers mortgage prices? The rate I’ve heard floated around is your Amerisave rate of 4.25% and it’s a smart move on their part to get that business before everyone offers the same thing. Do you think that’s connected & that we’ll then see lower mortgage prices in the future, or that this is the best option out there?
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JD,
Check the major credit unions in your area. My credit union has a 30 year fixed (that you would qualify for as an OR resident) for 4.85 (APR which, as you know, includes the closing costs). I’m currently doing a refinance with them and locked my rate at 4.875%. If you want to know the credit union, send me a PM. (The entire application process etc is online)
Hazzard
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When rates drop, my first call is always to my current lender to see about recasting my loan. To keep business, some lenders will change the terms of your existing mortgage to reflect current rates.
I have found this is well worth the effort, because you file a fraction of the paperwork and pay a fraction of the closing costs. (Last time I think I had to pay for an updated to my appraisal, and some bank processing fees. Around $500-$900, rather than the several thousand it would have cost for closing costs with another lender.)
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Do look at the rates on a 10-year and 15-year mortgage. It might be better to have a $1300 monthly payment on a 10-year mortgage and pay off the whole thing in ten years (or sooner if you continue to prepay as well). I got 4.50% on a ten-year mortgage. For a rate that low it *definitely* pays to refinance. And there’s nothing like knowing the house will be yours lock, stock and barrel very soon!
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Just to follow up, Bankrate says that AmeriSave has an APR of 4.5% on 15-year mortgages. I don’t know why they don’t list 10-year mortgages. I found mine through a mortgage broker. Watch out for the lowest rates, though; they tend to tack on fees that effectively make the rate not so good. So keep those in mind when comparing.
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Lots of good advice on mortgages here, http://www.mtgprofessor.com/
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I don’t see any reason not to grab a 30 year loan right now, even if you are on a 15-year “path”. At least where I am locally, there just isn’t much incentive to go shorter because the rates aren’t better. In fact, a few days ago rates were inverted; better for a 30 year loan than a 15.
If you get a better rate on a 30 year loan but continue to make overpayments like you were in a 15 year loan, you’ll still finish the loan in 15 years. There’s nothing magic about the term of a loan, it just determines your payment amount.
And if something happens to you financially when you are overpaying a 30 year loan, you can back off temporarily while you get your life back in order. You don’t have that flexibility with the shorter term loan.
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I agree to check credit unions. Awhile back we looked and our CU was offering 4.99%. The only reason we didn’t do it was because we’d have to fill out all the paperwork again which we didn’t think was worth it. We are paying so much ahead that it would only save about $2000 over the loan.
I would crunch all the numbers to determine how much you are really saving. If you are just paying on schedule, you can probably save a ton. If you are paying a lot extra, it might not be worth it.
Switching from a 30 to a 15 actually lowered our payment even though we are only 2 years in because we have brought down the balance so much. Consider if you want to make a big principal payment before you refinance to reduce your payment even more.
We did use lending tree. They did give us a very good rate (6.0% in 2006, about 0.5-1% less than any local banks gave us). The only drawback is having to do everything over the phone (which wasn’t that bad except they told us we didn’t need escrow and then all the papers had escrow added so it was a last minute panic). The other thing was we kept getting calls almost a year after the closing about whether we were still looking for a loan. Set up a separate email for spam so that you aren’t bombarded once you do decide.
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Another thing. Does anyone have an opinion about refinancing from a fixed TO an ARM? You hear so much about people wanting to get out of ARM’s, but the rates are much lower on 5/1 than on a 15 year for example, so if you are going to pay off in less than 5 years doesn’t it make sense? It seems like a good idea to me but the general trend is the opposite so I’m wondering if I’m crazy.
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I have not been looking at this type of thing at all because my rate is 5.25 since i got it 5 years ago. How much of a % drop should I be thinking about if I am going to refinance.
I just figured it would never be low enough for me to care. Is 4.25% low enough for someone with a 5.25% on a 150k mortgage enough to care?
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I’m amazed it hasn’t been mentioned in your blog yet, but it might be a good topic to research and blog about. There is a rampant rumour that the government is going to work some magic within the next month to get the interest rates for 30-year new mortgages (ie, no refinances, just sales of new/existing homes) to 4.5%.
It’s been discussed in quite a few articles, like this one:
http://money.cnn.com/2008/12/03/news/economy/treasury_mortgage_rates/
I’m not really prepared to sell my existing home as we were going to put it up for sale in the Spring of 2010, but if interest rates do drop to 4.5% I feel like I have to do it now as the next home we buy we expect to live in for a *long* time, if not the rest of our lives. It may not work out that way, of course, but it makes sense to approach it that way. I currently pay 6% and thought I had a good rate!
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A note about Lending Tree and other online quoting companies. Reader Beware. These companies are in the business of gathering and selling your information to anyone who will buy it. Lending Tree sells these leads to as many as 10 other people. Generally your info is sold for up to $50 a pop to the first person who will buy it. So beware about putting your info out on the internet so that companies can “shop” rates for you. If you’re just doing business by phone or internet, you get what you pay for: Joe Shmuck Con Artist working in his pajamas on his couch trying to make a fast back. Buyer Beware!!
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Question, how soon can someone refinance their mortgage?
We just bought a condo in August with a 7% interest rate (1st time home buyer).
If I could drop the interest rate to say 5%, I would be so thrilled!
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Chris,
If you got a 7% rate in August, then there had to be a reason why you have such a high rate. Rates in August weren’t that high for those with good credit scores. Unless your median credit score has gone up substantially since then, then I’d be surprised if you would get much savings now.
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I have the same question Chris@16 has: how soon can one refinance? I was dead grateful for my 6%, but I would be happy to be paying less (or rather, paying more on principal).
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You’ll have a lower monthly payment, but you will have an extra 5 years of that lower payment – don’t forget about that!
We refinanced several years back and paid some points to have a 5.375% interest rate. I don’t know if it was the best decision, but I preferred to have the lower monthly payment. Since we have no other outstanding debt, we do overpay on our mortgage because we want to be out of it by the time the kids go to college, but in the case of emergency, we don’t HAVE to. To me, this makes me feel more secure. If one of us gets laid off, we can just lower what we pay on our mortgage and our monthly expenses automatically go down.
Whether or not to refinance? I think it depends on your goals…
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@Chris G – As long as your current loan doesn’t have prepayment penalty, you can refinance at any time.
I’m refinancing today evening. 30 Year Fixed, 5.25%, No Closing cost, No Lenders Fee, No Escrow. Loan amount 216K. I have explained how I got 5.25% and which lender gave me that best (5.125%)
http://www.lifestrikes.com/how-to-shop-for-mortgage-rates-my-experience/
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Well, from what I understand, the reason at the time is we were 1st time home buyers, didn’t put much money down, and I have a lot but a manageable amount of student loan debt. No late payments or anything like that.
I will check into this to see what we can get for a rate.
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@Chris G, La BellaDonna – All the above rates 4.25 to 5% is mostly available to home with atleast 20% equity. But, its worth to give it a shot. Don’t run your credit report yet. Shop for rates, then if you feel comfortable, then ask the broker or lender to run your credit report.
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Here’s the catch. I have a ton of equity on my home. My father-in-law sold me the condo for what was on his mortgage. So we have a $73k mortgage on a condo that is assessed at $120k.
One thing I am interested in is seeing if I can get the PMI off my mortgage too now.
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When you can refinance may be dictated by your mortgage. Some mortgages have prepayment penalties. The amount of equity you have in your home is another factor. I don’t know if any banks will refi or recast if your mortgage is now upside down (you owe more than your home is currently worth.) Some of the mortgages I’ve looked at are only for those with 20% or more equity, and those with less equity will have to pay a higher rate.
LO, much of the current mortgage mess is because people got ARMs, thinking they could sell before the mortgage reset… then they couldn’t. Now they are stuck with super-high payment they may be unable to afford.
Unless there is truly a compelling reason not to, I always stick with fixed rate mortgages. I really thought I’d be in my first home for just 2-3 years. I ended up living there for 11 years.
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I have 6.5, but until gov lays out a plan to help underwater mortgage holders. I had 25% equity on my house 1 year ago and now i have about 5-10% and banks do not want to lend.
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JD: Call me! 888 664-6651
I’m NOT a mortgage broker.
I recommend getting a 30-year fixed if that’s the lowest interest rate. Sometime they’re lower than 15s because the bank assumes they’ll have you longer. Thirties always have a lower payment, so IF you have an emergency, you can cut back on what you pay monthly. Like you’re doing: always pay more.
AND, paying it off in 5-8 years. Easy to do with equity cycling. Check it out here:
http://software.equitycycling.com/presentation
You didn’t buy my book before (Let Your Mortgage Make You Rich) because it wasn’t on Amazon; though, you could have bought it many places online by Googling the title. That taught me a lesson. It’s now on Amazon. And available on Kindle.
I’d like to have a conversation with you about saving on your mortgage, using some very creative techniques — whether you decide to refinance or not.
Equity cycling lets you take advantage of the VELOCITY of money. It trades expensive debt for cheap debt — the amount of debt remains the same.
Yes, please call me: 888 664-6651 (U.S.)
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We’re set to refinance next Tuesday at a locked rate of 4.65% with Wells Fargo. Our prior rate was 6.0%. We owe $209,000 on a house appraised at $310,000. Like JD and Kris, we’ve been making extra principal payments. Our credit scores are excellent. What we’ve found this last week or two is that if your numbers look good, the mortgage brokers have been very willing to negotiate. By shopping around and asking we we’re able to get the “loan origination” fee chopped by 40%. We had originally locked at 5.25% and then rates dropped again. They told us it would be $1000.00 to relock. We offered to take our business elsewhere and they dropped that to $400. By sending a good faith estimate from a bank with a lower rate but higher fees to Wells Fargo, we were able to get both the lower rate and the lower fees. Rates may drop farther, but for now we’re pretty pleased.
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Chris, you can refi whenever you like.
I’ve been through the refinancing process several times. No one has mentioned, but there are a few factors people tend to overlook when considering a refi:
* Banks don’t make loans for free. Even in a “no-cost” refi, you *will* end up paying some closing fees one way or another. Often these will be rolled into the mortgage balance so you don’t have to pony up any cash. This makes it all but invisible, but you have still spent that money!
* What is the payback period? My “no-cost” refis have typically actually cost me about $3000 on the bottom line. With a savings of $100 on my monthly payment, it would take 2.5 years to hit the break-even point on that.
* If you’re (say) five years into a 30-yr mortgage and refi to another 30-yr mortgage, you have to recognize you’ll be paying interest for an additional five years. To accurately compare the monthly costs of before and after, you should pretend the mortgage term is 25 years when you do the calculations.
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@lara – How are you paying in closing fees, lenders, points…?
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We’ve been in our house 19 years and have refinanced three times. The first time was from a 30- to a 30-year loan to lower interest 2 points. We were able to eliminate PMI at that point. A few years went by, we did the bi-saver payment thing, and refinanced for a 15 year loan when rates dropped another point or two. Our last refinance was to a 10 year loan at 4.625%. We’ll have the house paid for in another 5-1/2 years (but plan to pay it off even sooner using commission checks and an inheritance). The 10-year rate was the same as the rate for a 15-year loan. If you can afford it, getting your home paid off early is great.
Eliminating our largest monthly expense will free up a lot of money in our budget each month. And after investing $30,500 this year in retirement accounts but losing about $100,000 in net worth thanks to the economy and the hit to our account values, having a 4.625% return by paying off our mortgage is a wise investment to us.
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I took a look at rates the other day, and I could actually drop to nearly 4% if I switched to a 15-year loan (and save myself about 100K in interest!). Alas, according to zillow I am under water in my house by about 10K, so I won’t be able to re-fi (unless I can somehow show my house is really worth more)
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Many commenters have made good points. It’s very important to consider costs and how long you intend to remain in a home when refinancing. Also, for the one in seven people who are upside down on their house (according to a different USA Today article), refinancing probably isn’t an option.
Even when I was stupid about other financial decisions, Kris and I have always been diligent about our housing payments. I realize that it doesn’t necessarily make the most financial sense to pay off a mortgage, but for us, it’s what we want to do. Because of this, our loan-to-value is good, etc.
I think the biggest barrier for us will be verifying my income. I’m self-employed now! I’m not sure how this is going to affect our ability to refinance.
Also, I should note that it may just make more sense for us to keep prepaying our mortgage as we have been. I mean, if there are $6,000 in fees to get the mortgage we want, we could just apply that $6,000 to our existing loan!
We’re not sure what we’ll do, but I do intend to research things.
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I’m in the same boat as Bill M: I’d love to refi for a lower rate, but due to the decline in the home value my loan/value is too high. (If I’m currently making $1500/mo payments secured by my house, why doesn’t the bank think I can make $1350/mo payments secured by the same house?! Until this is addressed, the housing market is unlikely to stabilize.)
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Does refinancing typically involve a new inspection? I.e., if the house needs some work, should I do that first before trying to refinance? The house got dinged in the inspection when I bought it for having an improperly constructed porch roof, but now it’s actively and conspicuously rotting.
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I think this calls for a spreadsheet. You should be able to input interest rate, closing costs and your planned mortgage payment (inc overpayments) and work out the total that you would have to pay over the lifetime of the mortgage. I could make one for you if you’d like.
About the self-employed thing, I know that David @ My Two Dollars has struggled with this, and lenders said that he needed to have tax returns to verify his income.
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@EscapeVelocity (#39)
When we refinanced our first home, it didn’t have an inspection. It had a cursory appraisal just to be sure that it was close to the value that we claimed. This was in 1998. I think that inspections are usually there to protect you when you buy a house so that there are no surprises. If you’ve been in it a while, there’s no need for another. You’re well aware of the house’s faults!
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A good resource we’ve found is zillow.com. They have a mortgage search application kind of like lending tree, but they never take your info and sell it up the river so to speak. Actually all of the contact we got was through zillow, so unless we respoinded to a quote, the lender never even had our email address. We got at least 10 quotes within a few days.
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@raghu
I don’t have numbers in front of me. I know our total costs to refinance will be about $4500 which will take about 18 months for us to break even. We didn’t do any points. When we ran a cost/benefit analyses they didn’t seem worth it.
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If you like your current lender, why not just ask them about refinancing? That’s what we did and we didn’t have closing costs or fees anywhere near $6,000.
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I have a question for you wizards, this thread has awesome information.
I have an 80/15 loan on the house I bought 2 years ago. The mortgage on the 15 has a rate of 8.25 right now, on about $25k owed.
My question is, does the magic of re-financing work on a smaller loan?
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@Shannon – I have 2 loans right now, but in few hours, I’m refinancing to make it single loan. Banks don’t offer second loan for home anymore. So, you cannot refinance just the second loan alone. You will have to combine both the loans into one and that has to have 80/20 LTV.
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Dr. Jack Guttentag (the mortgage professor) has a list of certified “Upfront Mortgage Brokers” (UMBs).
http://mtgprofessor.com/upfront_mortgage_brokers.htm
“UMBs disclose their fees to customers in advance and in writing, and disclose the wholesale prices (rates and points) passed through from lenders. Customers of UMBs pay the broker’s fee plus wholesale loan prices.”
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Thanks for the info Raghu! Definitely what I needed to know.
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I am planning on a refi soon – I am on a 30 yr fixed for 6 7/8 – I cant decide if i want a 10 yr arm at 4.98 or 30 year fixed for 5.1%.
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I’ve spent the past 2 weeks looking into refinancing. It’s a pain but completely worth it.
JD – As someone who is also self employeed lenders have been asking me for the past 2 years of tax returns. It is an issue if you have less than 2 full years of self-employement. You’ll have to shop around a bit because different lenders have different rule about what they’ll accept.
To evaluate different rates and closing costs I’ve created a spread sheet that looks at the loan balance if I add closing costs to the loan and continue paying the same each month. I look out about 5 years to see where my balances would be and the differences.
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