“Lowest mortgage rates since 2012 spur refinancing wave” – CBS News
“All-time low mortgage rates will create all-time high confusion tomorrow” – MortgageNewsDaily
“Mortgage rates sink to their second-lowest levels in three years” – Washington Post
There you have it—mortgage rates are very low. And with that come many companies competing to refinance your mortgage, likely your largest expense. The COVID-19 outbreak has had major impacts on the economy and, during the first week of March, the Mortgage Bankers Association reported the highest level of refinancing applications since April 2009.
Some customers get sucked in with 800-number mailers or internet ads promising a refinance with “no closing costs.” While this offer is enticing, in my nearly 20 years of mortgage lending, I believe that educating my customers has made the difference when it comes to considering a refinance.
Allow me to illustrate a real-world refinance example:
Bill and Penny have a home loan with a balance of $350,000. They have great credit and good jobs so qualifying is not a problem. Their current 30-year mortgage is at a fixed rate of 4.375%. Pretty good, right? However, in the current rate environment, they might be able to get a rate of 3.50%, with an APR of 3.678%.
At their current 4.375% rate, their monthly payment is $1,747. Their proposed payment at 3.50% would be $1,571. That is a $176 monthly savings. If we use the assumption that the closing costs would be 1% or $3,500, then the cost of $3,500 divided by the savings of $176 would give them a return on investment of 19.8 months.
That is what a typical refinance is supposed to do—maximize savings for a small cost. The customer would need to either pay the closing costs at settlement or refinance the closing costs into the new loan, if the equity position on their home allows.
The aforementioned “no closing cost” refinance is quite different. This is where the closing costs (again, for illustration purposes, $3,500) are paid through the loan itself by raising the interest rate that Bill and Penny pay. A typical example might be that the rate is raised by .375%, so instead of a rate of 3.50%, the rate becomes 3.875%.
As a result, the monthly savings drops from $176 to $101. Still good, but that extra .375% added to the rate means that over the life of the loan, the amount paid by Bill and Penny is $27,000 on an out-of-pocket basis. This is nearly eight times the cost than if they had simply taken the lower rate and either paid the closing costs or rolled them into the loan, depending on their financial situation.
In any large financial decision, always find a trusted advisor to run the scenarios for you, taking into consideration your short- and long-term housing plans. Answering those 800-number ads may appear convenient but may actually cost you in the long run. To get answers to any questions you may have or to discuss refinancing options, contact us at 877-723-5571 or firstname.lastname@example.org.
Univest Bank and Trust Co. is an Equal Housing Lender. NMLS #415882