I just had a very astute reader contact me wanting to know if he should refinance his 30 year fixed rate mortgage. He was watching mortgage backed securities and noticed that the 10 year is at the lowest level in two years and the 30 year bond seeing a 3 year low! His current rate is 6.125% and he plans on staying in his home for 5-10 years.
It didn't take long for me to reply "not yet" based on him wanting a "no cost refi". If the rates continue to trail lower...perhaps.
"No cost refi", a catch phrase you hear thrown around on radio and television ads, means that the actual hard costs are financed into the mortgage rate. Nothing is free. A "no cost" refi may make sense if you're not planning on retaining the mortgage for a long period of time and your payment has improved enough to justify it.
As of tonight, a 30 year fixed rate-term refinance with an 80% loan to value would look like this (prepaids/reserves are factored separate):
- Note Rate 5.625% (APR 5.770) priced with 1% origination and closing costs (including title, escrow and reconveyance fees) of $2400 for a total amount of $6400. P&I = $2,302.63: a savings of $127.81 per month over the 6.125% scenario below which would take just over 4 years to break even on the cost to refinance.
- Note Rate 5.875% (APR 5.929) priced with zero origination/discount points and total closing costs of $2400. P&I = $2,366.15: a savings of $64.29 per month which would take just over 3 years to break even on the cost of refinancing.
- Note Rate 6.125% (APR 6.181%) priced with zero origination and a rebate of $2400 to pay for closing costs. Total closing costs due to borrower equals zero. P&I = $2,430.44.
If this home owner had any of the following, it would make more sense to take action now:
- an adjustable rate mortgage (ARM)
- private mortgage insurance
- piggy back second mortgage (fixed or home equity line of credit)
- reason or need to withdrawal equity
Should you refinance? It depends on what your motivations are and how long you plan on keeping your home and/or mortgage. Today's low rates are a great reason to contact a Mortgage Planner near you for a review of your current mortgage scenario.
By the way, if some of our elected officials in Congress have their way, you, Mr. and Ms. Homeowner, may not have the option of deciding whether or not you want to refinance unless the refinance has a clear "net tangible benefit"...HR 3915 has passed the House and will now take it's turn in the Senate. If you don't want Congress deciding whether or not you can refinance, please contact your elected officials ASAP!
