With the rate drop yesterday, mortgage rates are at amazing lows. People in the office are bragging about locking in 4.50% mortgage rates with no points, or 4.25% with 1 point. While I haven’t done a lot of in-depth research on this topic, I would agree that right now is a good time to explore your options. (Especially if you have a good credit score and a loan-to-value ratio below 90%.) My favorite source for helpful mortgage info remains the Mortgage Professor.
Breakeven Calculators
The main cost of a mortgage refinance are the points and settlement costs (appraisal, etc.). The primary benefit (when you aren’t trying to pull cash out) is a lower monthly payment. This way, you can find a break-even point after which you save money with the refinance, say 20 months. Obviously, you’ll want to be confident that you’ll be holding the loan longer than that. Here are two breakeven calculators: one and two.
If you want instant savings or are just short on cash, you can attempt to find a “no cost” refinance, where you get a rate with negative points that actually cover your upfront costs. Even better, to avoid funny business later, find a lender that actually guarantees that they will cover all settlement costs. However, your rate might not be the best.
After reading up on some articles on the Professor’s website, here seems to be a possible action plan:
- Check with competitors first to get an idea of what combination of rates and closing costs you can get. Try an Upfront mortgage broker or lender.
- Armed with this information, call your loan servicing company and ask about your remaining loan balance. Casually ask what could be done with the current low rates. If needed, use your rates collected previously to let them know you’re shopping around and make them go one better. Your existing lender may have more flexibility in waiving and/or reducing fees.
- Ask for a loan modification if your lender has not sold the loan, and are servicing it themselves (see below).
My Refinance Attempt
I am in the least common situation, where I got my loan through a community bank who did not sell the loan. They are both the lender and servicing agent. Thus, they are very interested in keeping my loan and not losing it to a refinance. After talking to them, the refinance route was not looking too good, and so they offered me a rate reduction instead. I got to keep my same loan with the same remaining term length, but the rate would be reduced from 5.625% down to 5.125% for a $500 fee. Neither of us has to pay for an appraisal, title insurance, document fees, recording fees, or another mortgage broker commission.
After running the numbers, I would be saving $150 per month, which would give me a break-even period of only 4 months! The catch: I had to lock today to get it guaranteed, and I could not lock again for 30 days. I decided to not to be greedy and locked it in (at no cost). I should get the paperwork tomorrow. If I have a $150 lower monthly payment for the next 29 years, that’s a potential savings of $50,000! ($150 x 12 x 29, but less if you calculate back to present value…)
It’s almost too good to be true, considering I don’t have to try and go through the hassle of a refi. In fact, since I paid points to lower my mortgage rate initially, I thought my chances for a profitable refinance were slim to none. Now, I still have to look at the fine print, so this is not a done deal.
Again, I am not an expert on this stuff. But given the weird situation we have right now, if you have a mortgage professional that you trust, you might want to give them a call. This one phone call today saved me tens of thousands of dollars. I just read a newspaper article that they have gotten more loan requests in the last two weeks than they have had in the last 11 months! So while they are busy again, they are less likely to take your business for granted.
Good luck, and share your success stories below! Oh, and if you missed it before, you can read about our (long) first-time home-buying experience here.
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I locked in 4.875% last week. I may have missed a boat a tad, BUT we had been waiting to lock in 5% all year (after trying early in the year and missing the 5 minutes rates were low). Anyway, since we have paid off almost $20k since our last refi, and this is almost a full point lower, we will save $200/month. So sure, we could have maybe gotten 4.25% if we waited, but this is our most profitable refi to date. Keep paying our old payments and we shave 3 years off the loan (I doubt we will extend the payoff though it is a 30 year loan. Our goal is to pay off 15 years and this will make it easier).
Anyway, good post. Our first mortgage was in 1999 at an 8.32 interest rate. Over the years we have refied down to 7%, 6%, 5%, etc. We last refied in 2003 and expected that to be the last time ever. But I agree, this was pretty much “too good to be true.” We have been able to lower our payment by about $500/month over the years, simply with lower interest rates.
You need a good FICO and a pretty decent amount of equity to refi. (I live in Cali – I don’t think 90% would cut it. They want to see a 75% loan to value). Best rates for 60% or 70%.
Jonathan,
Do you mean your total payment drops by $150? I guess you would figure this out eventually, but you need to look at exactly how much principle you are paying and how much interest, and as you know include your tax benefit.
I just locked in 4.875 yesterday from 5.375 with $1000 closing costs and then calculated that my savings of interest after the tax considerations are only around $500 per year. 2 year payback!
however, I am changing from a 15 yr to a 30yr in order to reduce my payment. If the bank will let me do it, why not? I am considering continuing to make the same payment amount which of course would greatly increase my true savings.
Were you not able to refinance because of your loan-to-value ratio?
I hope Jonathan keeps paying the same amount as before and saves a lot more than 50,000.
I’ve heard of loan modifications (before this whole mortgage thing going on) — from someone at work. She told me she had contacted her bank when rates dropped really low, and they worked out something with her, like you described and she said it was called a modification. She also had to pay some kind of fee, but saved so much in interest, it was totally worth it. Closing costs are the worst part of re-financing, so this is totally a great deal.
I did a loan modification once, long ago. There really isn’t any catch. As you said, since it’s modifying your existing mortgage, the costs are much lower than doing a refi. And they don’t even pull your credit history!
I’ve owned my own home since 1991, and in that time I’ve only managed a loan modification once. All of the other times I’ve asked, the bank had sold the loan. As you said, Jonathan, you’re in an unusual situation having the bank keep your loan.
I’m considering, but I already have 5.25%, so it’s not worth the refi closing costs. The only other advantage that I would have is to borrow more money against my home and invest it else were.
After reading this and the comments, I called the loan servicing department where I got my loan (they didn’t sell it). The customer service person said that I could only re-do a loan if it was within 45 days of adjusting or I was behind on payments. Neither situation applies–I just want a fixed-rate mortgage (I have a 10-year adjustable because I know I’m leaving in 9 years, and I wanted a low payment) that gives me a payment lower than my current mortgage. The customer service rep. really couldn’t comprehend why I was calling so I bluntly said that I was going to refinance with another company, and I was just calling to see if they wanted to keep my loan. I guess they don’t.
Jon, I think you got a great deal right there. Anytime you can lower your interest rate and not pay much out of pocket would be a good deal.
I have a 5 year ARM with 4.375%, which ends in March 2009. I wonder should I refinance now, and be safe to take a 30 year 4.5-5%. Or wait until next year?
What do you all think? thanks.
Do you think they’ll do a loan mod from an adjustable to a fixed rate? I’m pretty sure my lender is holding the mortgage, it’s a credit union. I desperately want out of the 5 year adjustable, it seemed like a great choice at the time. I can’t refi with another lender, my credit and income are great but I’m way underwater. I bought in LA in 2005, even if I had put 30% down I’d be underwater.
One thing to consider in your decision to refinance now or later, is your loan to value, which may increase over time if home values continue to drop.
I don’t know how common this is, but I have used a mortgage broker for 12+ years now who writes loans w/no points, no closing costs. I am closing on a re-fi tomorrow morning ($400k, 30 yr fixed @ 5.375%, 25% LTV – we have a ton of equity in this place). I totally chase rates b/c there really is no cost to refinance aside from time invested pulling the necessary documentation/paperwork. I have to hold this loan for 3 months, but can lock in a new refinance in 30 days or less. This interest rate fluctuation is found money in my book! I will keep refinancing in eighth point increments until rates hit bottom!
PS – Luu, I am quite conservative, but would definitely refinance now!
I am in exact same situation as Luu’s. 4.375% ARM adjusting in March 2009. Based on the present market conditions, it might adjust with 1 year ARM below 4.375%, so not sure whether to shop for fixed rate or wait and watch. Comments anyone? Thanks.
Congratulations on successfully lowering your interest rate. Your in-place modification is similar to a no cost refi. No/low out of pocket cost for you for a lower rate. I also e-mailed and called my mortgage broker for refi rates today.
I’m in similar situation as Luu. Have ARM for 4.5%, which will reset in December 2009. Should I refinance now to 30 yr fixed or wait a year?
Loan-to-value ratio was definitely a concern. I have an idea of what my house would appraise for now, but it would be the border of 80% LTV and I might have to chip in money depending on how conservative appraisers have become. I have seen some rates with a ceiling of 90% LTV. Another reason that a loan-modification looks most promising.
For refinancing an ARM, try using this calculator. You’ll need to estimate how long you plan to stay in the house, as well as the stats on the two loans you’re comparing.
the problem with refiancing is that most home owners do not have 20% equity in their home due to drastic drop in home price in the past year. 30% my my neck of the wood in los angeles california.
so if you want to refinace, be prepared to pay mortgage insurance, which can add $200 to your monthly mortgage bill.
Raghu, may I ask who you are lending though?
I have been shopping loan to refinance for last 4-5 months to lower my monthly payment. I locked 5.50% just before thanks giving. But, rates dropped further. I’m closing tomorrow LTV 79%, 216K, 5.25% – No Closing Cost, No Lenders Fee, No Escrow – 30 year fixed. With current market scenario, I thought No cost option will be better. One other lender gave me 5.125 with Escrow.
That’s a huge win, Jonathon. Nice move. I may have to look into this soon.
Can someone tell me where I can find rates bellow 5%. Everywhere I look they are 5.3% and up.
I currently have a fixed 5.875% loan for 15 years (amortized for 30). The loan amount is $450,000. I called BofA and they can lock me in for fixed 30 for 5% (No points or origination cost) The total cost comes to $2800 in closing costs. I would save roughly $250 per month. Thoughts on this is a good deal?
Should I wait to see if rates dip in the 4s? Also, check for lower closing costs?
He wants me to commit by today or tomorrow to lock in…
hi all,
Can you break out of a deal after you lock in over the phone?
We should all be careful to look at APR and the rate, and the points.. and closing costs.. in addition to looking to make sure the refi makes sense.
I told my mortgage broker that I would pay no points and that I wanted to pay closing costs out of my pocket. Our credit and equity are very good..
so the broker called and said “wow the rate is 4.875” you should lock in and I did. This was Wednesday before noon. He called me today and in passing mentioned an APR of 5.1. so.. I looked it up and it seems this is just another way of charging fees. It’s not points but it sure acts like points. It’s not closing costs because it is not paid up front. as far as I can tell it is simply a lie about your rate where the “rate is 4.875” but the APR is something different.
So I’d like to call him on this dishonesty and not go through with the deal. Can I do this? I suppose it would look bad on my credit..
any thoughts out there?
I’m currently at 6.125% for 30 years. I’ve been quoted anywhere from 4.75% to 5% for 30 years. And as low as 4.5% for 15 years. After running the numbers, it puts a smile on my face. Granted, I still have to screen all the closing costs.
I’m 5 1/2 years into a 15-year fixed at 5.00% and really looking forward to having my house paid off so I can have that extra cash flow, so it would have to be a huge savings for me to do it. I wonder if anyone does 10-year mortgages?
Anyone have thoughts on ht epluses or minuses of sticking with say Bank of America or Wells Fargo rather than some little player ?
@Andrew – I have posted my mortgage experience in my site. It was long article, so I couldn’t write as comment.
@Mark – If you haven’t paid any deposit, you can just walk out. There is no harm. When you ask for rates next time, make sure you get the closing costs too. Rate will be deceiving, but lenders recover that in closing costs. Comparing No Cost loan is much easier than loan with closing costs. Credit report run within 14 days for one purpose ( say mortgage or auto loan) will be counted as one hard hit. So, you can find different lender and lock the rates.
@Mister_s – From what I have seen today, you can get 4.875% for closing cost around $1700. Closing cost will vary based on the state. I would find a broker ans try to get 4.875% GFE and get BoF to match it, if BoA is you current lender.
@JD – I was actually waiting for this article from you. Since you are always on top of things, I as wondering why you haven’t posted anything about lower mortgage rates 🙂
Thanks Raghu,
The closing costs were capped at $1000 and I said I would pay those up front. The only issue was the APR versus “the rate”. I’ll talk to the guy on Friday to see what’s up.
The “rate” is the actual interest rate on the loan principal. “APR” takes into account various additional costs of the loan like points and certain loan fees. It’s designed to help compare between different loans but some lenders fudge the numbers a bit to game the formula.
My has gone down about 30% in value and my mortgage is close to what the house is worth, do you know if banks are doing anything to help us out? I never been late…
I think although the financial market is starting to look better, I think they still need to offer more, as a lot of people will have lost their loan to value amount and people will still want to make money on their home and not let it become a pit.
Just talked with our mortgage lender, Chase. I told them that I wanted to lower my current rate of 6.625% (30 year fixed) and stick with them. They could only offer me an official refinance, which I can easily find better terms with at another lender, and told me that no one just “modifies” an existing loan to a lower rate. I even called the loan modification department as they said they couldn’t do anything for me. Oh well.
now, i don’t get this…. why screw the community bank? if i were you all, i would go put a large screw to either a chase, or citi, or BoA not a community bank or a Credit Union… come on, we need these local banks not the big ones… screw all the big ones…. they the ones that send our money somehwere else… i am not just crazy… if you really want to know why i say this, research a former HUD secretary by the name of Catherine Austin Fitts (former GS employee)
Just a follow up on my previous email…So my BOFA Loan guy called and said my 30 year fixed at 5% (JUMBO) moved up to 5.25% based on the influx of mortgage requests.
I told him I really wanted something in the 4s and to look out for me. Just giving everyone here a head’s up if they are comparing GFEs. I live in California, so I am hoping things continue to stay low. In hindsight, I should have taken the 5%, but I will be patient this week and start to talk to more people
good luck and thanks for your replies.
GMAC is a joke. Because I’m not a delinquent scum bag, they won’t modify my loan and give me a rate reduction.
And due to the lovely economy, my home won’t appraise for enough to even refi so I’m stuck at over 7% with no options.
I just sent an email off to Wachovia to find out if they will decrease my interest rate with little or no paperwork. Or see if I have to start over with someone else….
I refinanced my loan few hours back. When I was signing the papers, notary person told me – they sold my loan to Countrywide. My current lender is CW and they wouldn’t lower my rates or match the offer I had. I really don’t understand the reason behind this.
My friend locked the rates with Wachovia yesterday. His current lender was Wachovia. He had 5.875% and new rate is 4.625% with $2500 in closing.
A WAKE UP CALL FOR ANYONE WITH AN ADJUSTABLE RATE MORTGAGE:
Fixed rates are now at levels not seen since the 1960’s!!! Those of you asking whether you should refinance now or wait, the answer is simple. RUN don’t WALK to your nearest mortgage broker or bank. Get an application started ASAP. It doesn’t matter if you have 6mo or 3 years left on your low rate ARM, it isn’t a 30 year loan at the lowest rates in a HALF CENTURY.
And another point, the mortgage industry is not prepared to handle the avalanche of loan applications that are being submitted. With every news article touting lower and lower rates and Jim Cramer screaming rates will be 3.5%, the system fills up with more and more applications. For most borrowers it will take nearly 60 days for a loan to close.
Longer-term rate locks drive up rates, so does supply and demand. If lenders have too much business they will raise their rates to slow down the volume. It is already happening. Consumers don’t get this and think they can sit on the sidelines and wait for rates to go lower and then suddenly jump in and get their loan refinanced. They will be the big losers and those that aren’t greedy and recognize the opportunity of a lifetime will benefit by taking quick action.
60 day rate locks are already here… just added a .25 to the points. you snooze you lose. the greedy’s are the ones who are going to be sitting it out. next! folks it costs to refi… you have to pay mlo’s, processors, underwriters… why do you think it should be free?
Heads up! Anyone who knows they will only be in the house for 1-5 years tops can try to roll over the whole mortgage balance into a HELOC. With prime at 3.25% and alot of banks doing prime – .5% or -1.00% with NO Closing Costs your savings could be HUGE! So $200,000 at Prime minus one is 2.25% – interest only is $375.00 a payment a month! Better than 5% 30 year fixed at $1089.00.
Disclaimers- NO CASH OUT TO REDO PATIOS OR BUY FURNITUTRE – that is what got us here in the first place. Banks usually will do 80% or less LTV up to $250,000 with good credit. PRIME WILL GO UP AGAIN in the future, but it will take years, hence 1-5 years in house. If this loan makes you nervous – fine. Pay the 30yr fixed payment of $1089.00 and kill $700+ off the principle every month and be out of the house in 1-5 years with more cash in your pocket.
Here’s what Mortgage Professor has to say about HELOC
http://www.mtgprofessor.com/a%20-%20second%20mortgages/what_is_a_heloc.htm
So, I’m not sure how to weigh the advantage on this HELOC. Any thoughts?
The rates are bound to be bumping around for the next couple of months. The real question that everyone has to answer is what are your short and long term goals with financing you home — depending on those answers, there could be some really significant differences in what you’d want to do with the lower rates.
Loan-to-value ratio is stopping me from refin. My condo value has decreased by about 10%. In order to refin, I need to pay down my loan with about $10k.
I can refin at 5.125% (which knocks one point off my current loan) and it will lower my monthly payment by about $250.
With $10k (paying down loan to get 80% value) and about $2,700 closing fees, I will have to come up with $12,700 (up front).
Is it worth to do that; especially I don’t plan to stay at this place for 30 yrs?
JT,
there is no universal answer because it totally depends on your personal situation and personal finances. You obviously should consider how much savings you’d be left with. Also, you’d want to consider how long it will take you to financially recover from the $2700 spent on lowering your payment. It seems like a relatively bad deal overall to me.
In my case, I am refinancing a 182,000 loan from 5.375 to 4.875 with only $1000 in closing costs. This will still take about 1.5 years to recover from in terms of overal wealth. However it is worth it to me because I want to have better cash flow and this refi drops my payment around $900.
Refinancing now is an absolute NO BRAINER!