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Posted October 17, 2015
in Mortgage Strategy

“Should I Refinance?” – What To Do About Today’s Low Mortgage Rates

Refinance your loan while mortgage rates are low

It's Time To Consider A Refinance

Current mortgage rates have dropped again, now retreating to levels not seen since late-April. If you missed your chance to refinance when rates crossed 4%, today is time to revisit.

There is money to be saved at today's low rates.

According to Freddie Mac data, the typical refinancing household will save more than 30% on their mortgage each month via a rate-and-term refinance.

That means for every $1,000 you pay to your bank today, you could reduce your payment to $700. That's huge.

Additionally, there are an estimated 6.5 million homeowners eligible for a refinance to today's low rates which means that a lot of people are letting their chance to refinance slip by.

If you haven't seen today's low rates, check them out now.

Click to see today's rates (Nov 28th, 2015)

Homeowners Holding Loans For Too Long?

According to Freddie Mac, U.S. homeowners wait a long time before they opt to refinance.

In this year's second quarter, the median age of a refinanced loan was 5.6 years. This means that the typical refinanced loan dates to early-2010, when 30-year mortgage rates were in the 5s; and, home values were in the crater.

Today's rates are in the 3s. Yet, few homeowners take advantage.

Even the government is perplexed.

Via the FHFA, and to boost interest in the Home Affordable Refinance Program (HARP), the government has been hosting "town halls" nationwide to discuss the merits of refinancing to a lower rate. The FHFA website goes so far as to list the number of eligible homes by county, to help boost interest.

Cook County, Illinois tops the list.

Click to see today's rates (Nov 28th, 2015)

Should You Refinance With Mortgage Rates Below 4%?

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.

There are two common "arguments" against refinancing. Both can be misleading.

The first argument goes that it doesn't make sense to refinance unless you're lowering 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 this "conventional wisdom".

The Fallacy Of "Saving One Percent" On Your Mortgage

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. So long as costs are held low, even a quarter-percentage point reduction can be worthwhile.

You don't need to save 1 percent to have a refinance make sense. You only have to save money.

The Logic Leap In The "Recoup Your Closing Costs" Strategy

Another reason homeowners pass on a refinance is because they think they'll never "recoup their costs".

They rely on a vaguely-mathematical approach known as the "Break-Even Method" which, it turns out, is as flawed as the 1% Fallacy.

The main issue in using the Break-Even Method to evaluate a refinance is that the break-even formula makes three huge assumptions.

  1. That you'll never want to refinance your home again
  2. That you'll never need to refinance your home again
  3. That you'll never sell your home or move from it

These assumptions carry heft.

Of course you may want to refinance your home sometime in the future. There are a lot of reasons why you might.

Maybe mortgage rates have dropped again. Or, maybe you'd like to take cash-out for home improvement project, or to 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 64% less mortgage interest over time.

Now, before you say "mortgage rates are as low as they can get", remember that people have been saying that since 2009 and, every year, they've been wrong.

People are notoriously terrible at predicting the future of mortgage rates.

Mortgage rates can go lower. Wall Street is unpredictable. And, furthermore, your financial situation could 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 your break-even point.

So how can you tell whether it's a good idea to refinance?

Click to see today's rates (Nov 28th, 2015)

Fool-Proof Savings: Zero-Closing Cost Loans

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.

The good news is that no-closing cost mortgages are readily available across all loan types including FHA loans, VA loans and conforming mortgages.

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.

What Are Today's Mortgage Rates?

Today's mortgage rates are lower than they've been in months. There are refinance opportunities everywhere. Ignore "saving one percent" and your "break-even" -- look at your potential savings instead.

Take a look at today's real mortgage rates now. Your social security number is not required to get started, and all quotes come with instant access to your live credit scores.

Click to see today's rates (Nov 28th, 2015)

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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