Posted September 12, 2014Tweet
There are more than $800 billion in outstanding U.S. mortgages with rates of five percent or more. If your mortgage is one of them, compare current mortgage rates today. The monthly savings are topping 30% on average.
According to Freddie Mac, U.S. homeowners are holding home loans longer.
In the second quarter of 2014, the median age of a refinanced loan was 7.3 years, up two years from the year prior and nearly three times the median of late last decade. It's also the highest reading since Freddie Mac began tracking such data in 1985.
Despite mortgage rates hovering near four percent -- and many lenders quoting rates in the 3s -- today's homeowners are less likely to take advantage on falling mortgage rates than homeowners during any period in history.
Even with a boost from the HARP refinance program, the typical refinanced age remains elevated.
It's an odd behavior when we consider that mortgage rates are near an all-time low, and that tens of thousands of home loans are "in the money".
Even the government is perplexed. It recently launched a campaign to identify refinance-eligible homeowners, listing the number of eligible mortgages by state. Not surprisingly, the majority of homeowners are in populous states including California, Texas, and Florida.
However, there eligible homeowners in all 50 states, and the District of Columbia.
At today's mortgage rates, the typical household saves more than 30% via refinance.
It's a common question: Should I refinance my mortgage?
With lenders quoting rates below 4 percent, the answer would seem like a no-brainer, too. Yet, when mortgage rates drop to new lows, homeowners often wonder whether it's "worth it" to refinance at all.
When mortgage rates drop, there are two main arguments against refinancing. Both can be misguiding.
The first says that it doesn't make sense to refinance unless you lower your mortgage rate by one percentage point or more. The second says that it doesn't make sense to refinance if you're going to move before your loans hit its "breakeven" point.
Let's debunk these "conventional wisdom" pointers.
The "Saving One Percent" argument is a holdover from the 1950s when closing costs were big, loan sizes were small, and homeowners lived in homes until their death. Back then, when loan sizes were typically less than $60,000, a homeowner had to lower its mortgage rate at least one percent to save $1,000 annually.
At today's loan sizes, the typical refinancing homeowner can save six times that amount.
Even a modest mortgage rate reduction can result in substantial monthly savings. Many homeowners can make a quarter-percentage point reduction worthwhile, so long as costs are held low.
Yet, because of the One Percent Fallacy, homeowners will sometimes insist on getting that reduction -- even if it requires the payment of discount points, which can negate the long-term value of doing your refinance in the first place.
You don't need to save 1 percent. You just need to save money.
Sometimes, homeowners will pass on a refinance because they think they'll never "recoup their costs". This is known as the "Break-Even Method" for evaluating a refinance and it, too, is a flawed approach.
The main issue in Break-Even Method is that the break-even formula makes three major assumptions.
You may want to refinance your home in the future for a host of reasons. Maybe mortgage rates have dropped again. Or, maybe you'd like to take cash-out for home improvement project, or diversify your assets.
Additionally, 15-year mortgage rates are extremely low -- maybe you'll want to reduce your long-term interest payments because 15-year mortgages pay 65% less mortgage interest over time.
Now, before you say "mortgage rates are as low as they can get", remember that experts said that every year from 2009-2014, and every year they were wrong.
Mortgage rates can go lower. Wall Street is unpredictable. Plus, your financial situation can change. That, too, is unpredictable.
It's for these reasons that the Break-Even Method fails to work -- you can't possibly know for how long you'll hold your refinanced loan, which means that you can't really determine the break-even point for recouping whatever loan fees you'll pay.
So how can you tell whether it's a good idea to refinance?
There's a better way to know whether it's time to refinance -- better than the One Percent Method and better than the Break-Even Method.
Can you save money and pay nothing to do it? Yes, you can. Use a zero-closing cost mortgage.
Zero-closing cost mortgages are precisely what their name implies -- they're mortgages for which there are, literally, no closing costs. When there are no closing costs, there are no break-even points to consider, and no one-point savings to monitor.
When you can lower your mortgage rate and pay nothing to do it, that's when you refinance.
In general, for loan sizes of $250,000 or more, you can get a zero-closing cost mortgage by increasing your mortgage note rate 25 basis points (0.25%). For loan sizes over $400,000, the typical increase is 12.5 basis points (0.125%)
Zero-closing cost mortgages are available in all 50 states.
30-year and 15-year mortgage rates are near a 14-month low. With potential mortgage savings reaching 30% or more, it's an excellent time to consider a mortgage refinance -- especially if you can do it with zero costs.
See today's live rates now. Mortgage rates are available for free online with no social security number required to get started and no obligation to proceed.
The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.
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2014 Conforming & FHA Loan Limits
Mortgage loan limits for every U.S. county,
as published by Fannie Mae & Freddie Mac, and the FHA.