Should I refinance? Reduce your interest rate with 2018‘s low rates

Dan Green
The Mortgage Reports contributor

In this article:

When mortgage rates drop, homeowners typically wonder: Should I refinance my mortgage?

  • Getting approved for a mortgage is simpler and faster than it used to be, so your decision to refinance should be based on finances, not emotions.
  • In general, you should refinanance if a refinance will save you money — and if you can pay nothing to make it happen. This can be accomplished through a zero-closing cost refinance.

It’s time to consider a refinance

Current mortgage rates are holding low.

If you missed your chance to refinance your home last year, it may not be too late to secure a world-class mortgage rate. Dropping your rate by just 1.0% — from 5.25% to 4.25% — puts ten percent of your mortgage payment back into your pocket each month.

That means for every $1,000 you pay to your lender today, you could reduce your payment by $100.

That’s $12,000 saved over the next 10 years — simply by doing a refinance.

Additionally, there are still millions of homeowners eligible for a refinance — and you may be one of them.

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

Verify your refinance eligibility (Dec 13th, 2018)

Homeowners holding loans for too long?

Today’s mortgage rates are hovering in the 4s.

You would think homeowners would be rushing to refinance their homes. Low mortgage rates and lower monthly payments help secure a better financial future.

Yet, the majority of refinance-eligible households are currently doing nothing. They’re letting low rates pass them by.

The government, for one, is perplexed — especially because it’s Home Affordable Refinance Program (HARP) is in its last year and volume on the program has dropped to an all-time low.

To spur interest in HARP, then, and to help consumers understand that HARP is not a scam, the program’s sponsoring agency has been hosting “town halls” with underwater homeowners nationwide. It even goes so far as to list the number of eligible homes by county.

Cook County, Illinois tops the list.

But, it’s not just HARP-eligible homeowners who are eschewing the opportunity to refinance. Homeowners with all types of home loans are doing the same.

And, with no promise that mortgage rates will stay low, isn’t it worth a check of today’s rates to see for what you’re eligible?

Verify your refinance eligibility (Dec 13th, 2018)

Should you refinance your mortgage in 2018?

When mortgage rates drop, homeowners typically wonder: Should I refinance my mortgage?

Low mortgage rates are enticing, but homeowners balance the want for a lower rate with the question of “Is this even worth it?”

They worry about things other than low mortgage rates; maybe how they felt the last time they applied for a mortgage, or things they’ve heard from friends or family about the process.

It’s understandable to avoid refinancing because of the stress it may add to your life, but what if that stress is misplaced? The mortgages of 2008-2012 are very different from the mortgages of today.

Getting approved for a mortgage is simpler and faster than it used to be.

And then there’s the question of “Does it make financial sense to refinance?” On this point, it’s best to avoid “common knowledge” because the common arguments consumers make against refinancing can be quietly misleading.

Perhaps you’ve heard these two arguments.

The first argument against refinancing 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 that 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

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 a 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 65% less mortgage interest over time.

Now, before you say “mortgage rates will never go lower”, remember that people have been saying that since 2009 and, every year, they’ve been wrong.

Heck, they were even saying it three weeks ago and they were 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?

Verify your refinance eligibility (Dec 13th, 2018)

A “safe” refinance option: The zero-closing cost 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.

The good news is that no-closing-cost mortgages are readily available across all loan types including FHA loansVA 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%).

The extra bump in your mortgage rate creates more value for the lender. The lender then uses this extra value to pay your loan’s closing costs on your behalf. It’s a win-win situation, and you’ve paid nothing to get your refinance completed.

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.

Get today’s live mortgage rates now. Your social security number is not required to get started, and all quotes come with access to your live mortgage credit scores.

Verify your refinance eligibility (Dec 13th, 2018)