…because it looks like I’m getting another one. After seeing repeated news articles titled “Mortgage rate set record lows”, I’m now looking at refinancing to a 15-year fixed mortgage for 3% with all lender closing costs covered. I’ve seen multiple quotes for under 3% and getting under or close to zero in net fees.
Here’s a chart of the historical mortgage rate averages, courtesy of HSH.com. It includes the 30-year fixed, 15-year fixed, and the 5/1 30-year adjustable. Since I bought my home less than 5 years ago, 30-year fixed mortgage rates have ranged from a high of 7% to just above 4% today.
Even though I stopped trying to predict mortgage rates a while ago, I still find it hard to believe that I started with an interest rate of over 6% and now could be paying under 3% with a no-cost refi.
Alternative investments
If I successfully close on this loan, I don’t know if I’ll be aggressively paying it down as much as before. It’s important to note that the risk levels are not the same for the options below, but the interest rate environment is finally tipping to the point that I’d consider investing instead of paying off 3% debt.
- I could buy super-safe US Treasury bonds, with yields at ~2.2% for a 15-year maturity. Interest on Treasury bonds are exempt from state income taxes.
- I could buy a municipal bond fund like the Vanguard Intermediate-Term Tax-Exempt Fund (VWIUX), which invests in investment-grade municipal bonds. The fund holdings have a duration of about 5 years and yields nearly 2% federally tax-exempt. If you’re in the highest tax bracket, that would be an effective yield of ~3%.
- If I lived in California, I could buy shares of the Vanguard California Long-Term Tax-Exempt Fund (VCITX) with 2.60% yield that is exempt from both federal and state income taxes, with a duration of 6.4 years. That could be an effective yield of well over 4%.
- I could take on more risk and buy shares of mature, dividend-paying companies. The Vanguard Equity Income Fund (VEIRX) has a current dividend yield of nearly 3%.
I’m going through a local mortgage broker, but you can find similar rates over at Amerisave. If the “all lender fees and points” is negative, that means the credit they give you is more than all closing costs including appraisals and title insurance. (Anyone use them before?) Compare that with rate quotes from and Quicken Loans.
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Jonathan, I’m in the same boat and looking to do another refinance but not sure how it is free? I’m in NJ and the costs are about 2k with title insurance, appraisal costs, and other fees.
@Derrick – A rate sheet should include both the interest rate and the points associated with the loan. As rates go down, you’ll pay more points. Look for loans with negative points, which technically pay you to get the loan. If those credits are greater than the closing costs, then your refi can be free. In some states you can’t make money, so you just want to pick the points to be high enough to cover your settlement costs.
The credit amt is subtracted from total fees correct? So just because you see a 400 credit doesn’t mean you won’t pay any closing costs. Do I have that right?
The rebate is from the lender to you. The settlement costs go to various people. Title insurance, closing fees and attorney fees are paid to your closing attorney/agent. The appraisal fee is paid to your appraiser for the appraisal of your property.
The rebate should be able to more than counter these costs if you have enough negative lender points.
Now, you’ll also have things like partial interest and escrow (taxes and insurance) at closing, but those are things you would have to have paid anyway.
Hi Jonathan – I just checked out Amerisave for Virginia, and I do not see rates at 3.000% with no closing costs. If they are truly no closing costs at all, the APR should match the interest rate, right? Amerisave’s 3% rate for Virginia has an APR of 3.408%. Compare to CapCenter.com, a place I have used, where the rate and APR are both the same. When I refi’d at CapCenter, I still paid escrows and partial interest, which were not part of the APR calculation.
Am I missing something? Is Amerisave calculating the APR differently?
I used Amerisave for a no-cost refi earlier this year. I was pleased with their service except that they sold our loan late in the month and I had to call the company which assumed the note for payment information to ensure I wasn’t late. Closing occurred at our convenience in our home. I will pull the trigger soon on another no-cost refi to shave another 0.375% off my rate.
Who are you using to refinance that gives such a good rate on a free refi?
We got a 15-year for 3 and 3/8 last year and I haven’t seen where I could justify re-financing again. Either way I’m very happy with the level at which the mortgage balance is dropping!
Just keep in mind that VWIUX fund used as an example has $50,000 initial minimum, so it is not for everyone.
Did your refi require an appraisal? I’d love to refi into a 15, but there’s a chance my place would be appraised at a level that would be more than 80% Loan-to-Value, which would make PMI kick in.
I’m not sure I’m getting the math on this post? Wouldn’t you need to be able to get more than 3% in order for this to make sense?
Say you have $100,000 saved and are thinking about paying off your 3% mortgage or investing.
Mortgage:
Your cost per year will be $3,000 in interest minus your tax benefit of $3,000 deduction against ordinary income. Assuming 35% (highest tax bracket as you mentioned above) and no state or city taxes to deduct, the tax benefit is $1,050. So your cost would be $3,000 -$ 1,050 or $1,950. That is, NOT paying off the mortgage will cost you $1,950 net of all taxes. If you can earn more than $1,950 net of all taxes investing, the smarter choice would be investing.
Investing:
The only variable here is the rate or return and the tax treatment. For investments with return taxed at ordinary income, you would need it to be more than 3%. This is just the calculation above done in reverse. That is, how to get $1,950 net of taxes on investment taxed as ordinary income? $1,950 divided by (1-35%) = $3,000 divided by $100,000 = 3% For investments taxed at lower tax rates, it would be similar calculation. For example, investments taxed at the dividend tax rate of 15% would only need to yield 2.3% or more because $2,300 * (1-0.15) = $1,950.
The math in reality is slightly more complicated than that because it seems like you are dealing with state income tax, for which I don’t know a rate to assume, but it doesn’t complicate it that much more. Still with VWIUX and 2% federal-exempt return would give you $2,000 before state taxes. So unless your state tax rate is 2.5% or less, the state taxes will reduce the after tax return to below $1,950 thus making paying off the mortgage the smarter choice.
And another wrinkle is that most people are probably not in the highest 35% tax bracket, which requires greater than $388k taxable income, thereby making the interest cost of the mortgage even higher, requiring an even higher return on investment.
As far as I know, all refi’s require an appraisal.
Its easier to get $0 closing with a larger loan. It depends a lot on the amount of the loan.
I think its easier to get $0 closing with a larger loan. I price checked a $400k, $200k vs $100k loan on Amerisave and the 15 yr fixed, 3% rate had -$4539, for the $400k, -$668 points on the $200k loan and $843 points on the $100k loan. With -$4539 points on the larger $400k loan its real easy to hit $0 closing costs. The same 3% rate for a $100k would cost you quite a bit more out of pocket.
The points are a % of the loan amount. However a lot of the closing costs are fixed amounts like a flat $400 appraisal fee, $15 credit report, $35 document filing fee. So any loan is going to have a minimum $1-2k closing cost but larger loans can get higher negative points and end up with $0 total out of pocket.
Also the loan rates and details on closing will vary a little from location to location. The exact closing fees and rules vary state to state.
If you refi with the same lender you can occasionally avoid an appraisal. I had a streamlined refi once with the same lender that was $0 and no apprisal. But if you’re shopping around then you’ll almost always need one.
That’s a great loan. One small note/clarification for those who aren’t familiar with bond’s duration. Don’t think of duration as the period of time that you’ll hold the fund. The fund’s duration likely won’t change much year over year. Instead, think of it as a risk measure. If interest rates rise by 1%, a duration of 5 means the fund will lose roughly 5% of its value.
Thanks to your post I am going on my 4th refi in four years. The first two I paid the costs on, which was a mistake. Not anymore. No cost refi all the way.
I started having this conversation myself just last night. We bought exactly two years ago and have refinanced twice already. Debating if it’s the right thing to do it again.
How many refinances have you done previously?
Wish I could say the same here in the UK! Mortgages are still going up despite the BofE keeping the base rate at 0.5%! There are virtually no deals out there and you need a deposit of between 10 and 20%! Gone are the days of 5% deposits and low rates! And forget re-financing! Impossible!
@Captain Cheapo – as jim says, if you refinance with the same lender, you can often avoid an appraisal. Also, if your loan to value ratio is small enough, they sometimes skip it. Last time we refinanced our 15 year mortgage which was in it’s 7th year (and that one was a refi of a 30 which had been paid down quite a bit), the loan was less than half the assessed value, so they didn’t bother with an appraisal.
But I would agree that in most circumstances, an appraisal is required.
All – I was listening to a show this weekend (Ric Edelman) and I could not believe what I was hearing. He said that he doesn’t get why people are rushing out to get 15 year mortgages when the 30 year are so low. I have a 15 yr and my principal is actually increasing at a much faster than with the 30 and I love it. He said people doing the 15 are half as smart…lol. does anyone agree with this?
He then went on to talk about how ‘cheap’ the stock market is…3 years into a bull market!! I almost lost it…this guy has a radio show?!
I know all companies have complaints on the net, but if you do a google search on AmeriSave the complaints are through the roof.
I have used Provident.com to refi last year. Really good rates (less than 3% right now on a 15 years fixed) and process was really easy. I might do it again!
@MBS – Great post! I’d add the tax benefits of a home loan are also negated as you really only receive a benefit when you pay MORE than what your standard deduction would have been. For a couple, you have to have $11,600 in write offs before you see a lick of benefit from writing off home interest.
@Derrick – Ric’s basic thought process is that nobody will ever give you money for 30 years at such a low rate. Any money you put toward the house (e.g. even paying it off like a 15 year loan) is wasting that benefit. Can you think of a 30 year time period when the S&P didn’t earn at least 3%?
The other thing is that money put into your house is somewhat locked up… You can’t get to it if you need it. If you had put those extra payments into a safe alternative, you probably don’t lose much and gain the benefit of liquidity.
He makes some pretty interesting points on 30 year mortgages… I wouldn’t completely write off his advice.
We used Amerisave for our last refi in 2009, their service was lacking at best. They asked for a TON of documentation, but it was requested in fragments over the 2 months we had to deal with them. Very annoying. The closing went smoothly, and they come to you, but overall I wouldn’t recommend them for service issues alone.
We just did another refi with a local mortgage broker, closed last week. This went much smoother overall, especially since I knew what information they would need. 15-yr fixed @ 3.125, no cost. The only negative was that the Title Company charged us full price for the Lender’s Title Insurance, although we should have gotten a discount because we bought an Owner’s Title Insurance policy when we bought. This was the Title company’s screw up, but keep an eye out for it. Overall, closing costs came to around $2K, and we only had to pay the $400 appraisal out of pocket.
Overall, this refi will “save” us around $160K, and our monthly payment only went up by $300/mo, not to mention we’ll own our condo in 15 yrs vs. 30. A no-brainer if you ask me. The piece of mind of not paying so much interest is worth it if you ask me, I don’t think “Ric” has much of a real argument here. You never know what investment returns will be, but with the 15-year fixed I KNOW with certainty that I will own my condo in 15 years, it’s a good feeling. Not to mention this is the LAST time I’ll probably ever refi, can’t imagine rates going near 2%, which is the next step that would justify another refi.
I just bought a house and did a cash-in refinance within a 6 month period just about now; got my rate down from 4.5% to 3.75% (30 year fixed).
I did look at 30 year Treasuries as an alternative as you do above. I remember doing the math carefully (calculating return on the extra cash that I put in for the refinance deal, and comparing that against the interest savings from the lower rate), and at first it looks like the Treasuries win; assuming reinvestment, by the end of 30 years, the compounded return from the Treasuries beat the interest savings from the lower rate.
But that was not the whole story. One key difference, as you point out, is the risk: paying down debt is a zero-risk “investment,” because you are discharging an obligation.
But the bigger thing in my mind is when you look at the schedule of returns. WIth the bond investment, you start making a small amount in interest; as you add this interest to the principal it compounds gradually as passes until, by the end of the 30 years, you’ve accumulated a lot of principal and are making a lot of interest.
If you pay the mortgage down, on the other hand, you pay substantially less interest right now, and the bulk of the “return” comes in the earlier years (and since we’ve been talking about duration in this thread, I guess that means that paying down your 30-year mortgage has a duration way, way shorter than a 30-year Treasury). I didn’t do the math on the present value of the earlier return because the few hundred dollars a month was already convincing enough.
@Maury, yea but how often do people actually stick with a mortgage for 30 years? I think I’d rather be debt free and save a few hundred thousand… I doubt the market will return anything close.
Hi
I tried to refi with Amerisave in 2010. They quoted me a rate and term when I filed the application and credit fee. They sent me a GFE and later after the appraisal was done, they changed the terms of the loan.
I had to contact BBB to get my appraisal money back.
I have used Provident Funding with much success.
They are reliable and have excellent rates
Since this is my first post, I have to thank you for your blog.
Excellent and accurate information that has helped me a lot
Regards
Raghu
Thanks for posting this Jonathan. I hadn’t really thought about refinancing as I just did it about a year ago to get down from 4.75% to 4.25%. I checked with my guy about a no-cost re-fi and was able to get down to 3.875% with no closing costs.
In essence, reading your blog last week just saved me about $90 a month on my mortgage payments and will lower my total outlay if held for 30 year by about $9K.
At 3.875%, there is a good chance I’ll be wanting to keep this house, even if just as a rental some day. Chances are I’ll be earning more in a Money Market fund at some point than I’ll be paying in interest… Nice little inflation hedge.
Don’t forget one benefit of a 30 year vs a 15 year: You can make extra payments that will pay off the 30 year mortgage in 15 and will have the benefit of being able to only make the regular 30 year payment IF something happens to your income. Job loss, major illness, etc.
With a 15 year you save a little on interest rate but that extra $300 or $400 a month (or whatever amount) in the payment vs a 30 year, is now required each month to avoid being foreclosed on.
Paying a 30 year off in 15 by making extra principle payments DOES require discipline so that you don’t drop the extra principle payments to buy something frivolous. As someone whose income was hugely reduced for a year due to a major illness, I really appreciated the ability to instantly reduce my monthly expenses by $300 a month and not worry about getting behind on my mortgage.