Real Estate & Mortgage Insights

There's More to Life than Interest Rates

A recent piece on the Wall Street Journal website asserted that with rates at absolute rock bottom even those who bought homes or refinanced their mortgages in the past year should consider refinancing again.

The average interest rate on a 30-year fixed rate mortgage loan has averaged below 4.25 percent for almost a month now – a rate unheard of in the latest half century. Last year at this time, the average rate was right around 5 percent.

So why should that difference in rates be enough to spur recent buyers into refinancing? Article author Amy Hoak gave the example of a borrower who had gotten a 30-year fixed-rate loan last year at 5 percent on a $200,000 mortgage. By refinancing into a 4.25 percent loan today, the borrower would save about $100 a month, but it would take about three and a half years to recoup the loan closing costs. Yet if people bought last year, knowing the market conditions, they are presumably planning to stay in their homes at least that long.

It is also possible to get a “zero-cost” mortgage refinance, which could make more feasible. Basically, you agree to a slightly less-than-rock-bottom rate and in return the bank pays the closing costs. In some cases, the closing costs are added on to the balance of the loan. This is obviously a great way to save yourself money upfront, but it does make the savings a little less enticing.

Traditional refinancing is an attractive scenario for most people for one or both of the following reasons: the borrower wants to reduce his monthly payments, or he wants to reduce the total amount of interest he'll have to pay over the course of the loan. So in the example quoted before, a borrower would save $104 a month, and about $30,000 in total interest payments.

Those are significant savings to be sure, but what is interesting about trying to market refis to recent borrowers is that, in general, if they bought in the past year, with all the stringent requirements and ratios being enforced, they likely bought at a price and with a rate that made for a fairly affordable payment. So a savings of $100 a month will probably not be enough to bring them back to the mortgage table with all of its details and paperwork, not to mention its costs.

And if they bought or refi-ed recently, they most likely already paid a significant chunk of change within the past year. Many borrowers simply won't have that kind of cash to plunk down again right now. Even if they did have the money, they may find it more profitable to invest rather than sink it into their homes.

So while some borrowers may indeed look to refinance at today's record low rates before they start to rise again next year (as predicted by the Mortgage Bankers Association), chances are the majority of those who recently signed a loan will not consider the savings to be worth the cost.



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