Here’s my situation, in January I bought a house. My interst rate is 6.25%, which wasn’t the greatest at the time, but not really bad. Now however rates are even lower, from what I understand which isn’t much, they are in the low 5s.
My question is in general how much of a drop is needed for it to be worth it to me to refinance? I have a loan of $119,000 at 6.25.
Also does anyone have any experience with places like Ditech? I’ve heard of problems with places like that but was wondering if it would be ok to go through some place like them.
(Mods I didn’t know where to put this so I dropped it in GQ, please move if need be.)
I have a co-worker who will be 67 (yes, sixty-seven) in September. He bought his house in 1975 for $40,000. I don’t know how many times he’s refinanced it, but I’m thinking at least a half-dozen. Now he owes $160,000 on it, and has a mortgage that ends in 2033. :smack:
I bought a new house nearly four years ago. According to the terms of my mortgage, I can’t refinance until after my fifth year, w/out a penalty attached. I could probably get a lower rate and will probably do it somewhere else. (I think it is highly doubtful that the finance co. who has your mortgage now would refinance their own loan at a loss to themselves) You can bet they will do the math and while it may look good for you, I guarantee you they will still get the better end of the deal. That’s why I would shop around.
The problem is that I need to get at least a couple of %points lower to make it worth the price (flat rate) the bank will charge just to do the paperwork. Then we have to agree to terms, penalties, insurance requirements, etc.
Right now or in the near future is probably right. I’d hate to refinance in say… 15 years for another 30.
So, you might save yourself a few $K by doing it now, as long as there is no clause in your contract disallowing it.
t-keela you need to give us more information. If there are no penalties and no transaction costs, then it’s worth re-financing every time the rate drops by any amount.
It’s much more likely that you will have some transaction costs - either as penalties for breaking a fixed term deal or as startup fees for the new deal.
The other thing you have to specify is how quickly you want it to be worthwhile - if you are saving $100 / month and the transaction costs are $4000, it will take you 40 mnths to break even - after that you are in the profit.
The interest on your loan is currently about $7400 pa
At 5% it drops to $5950
You could save $1450 pa by switching
Work out the transaction costs and divide by $1450 to find how long it will take you to clear them
e.g. transaction costs of $2900 would take you 2 years before you break even
You will need to get a cheap rate fixed for longer than your breakeven point before it’s worth bothering.
On the other hand, I switched mortgage (in the UK) last year with transaction costs of $9000 - large escape payment from what had seemed like a good deal at the time. Using an offset mortgage with some savings, we managed to clear that in under a year.
Select a breakeven timeframe you are comfortable with, one, two, three. . .years. Compare the total costs if you keep your existing loan with the total of the new loan. Pick the cheaper.
If you refinance, then that is the old loan. Any closing costs you have paid are sunk costs–you aren’t getting them back whether you refinance again or not, so they are irrelevant to future financing decisions. That is, keep refinancing if the new comparison is cheaper.
If rates down a week after refinancing, the issue is whether the newest loan is cheaper than the one you just got.
The idea is to ride the interest rates downward, rather than trying to predict rate directions. NO body can predict interest rate directions consistently.
I’m assuming you will not be increasing the term of new loans.
aahala I’m not sure I understand what you are suggesting here.
What are you doing with the closing costs in your example? You have to include that as part of the cost of the new loan or it all becomes meaningless. But then you are talking about a breakeven period - which only makes sense if you ARE including the closing costs.
I am including all costs for both loans through the selected breakeven period.
This may include prepayment penalties and will probably include closing costs on the proposed loan.
What you should not include are costs that are sunk. If you paid closing costs on the loan you already have and they are not refundable whether you refinance or not, then don’t consider those in your decision.
It’s a fairly common tendency for people to want to wait for the lowest rate. This is like waiting for godo. You will only know the absolute lowest rate AFTER it is unavailable.
Maybe the guy is making 30% on the money he’s borrowing on his house, so he’s using low interest rate tax deductible money to make even more money. He could be the smarted guy you know. He could also be using all the money he’s borrowed for pizza and chips, though.
On topic now: the thing to do is just look around for as many loan programs you can find and made a spreadsheet showing the cost (closing costs) versus the benefit (interest not paid) of each loan program. Before you do that, though, you should think about the value to you of saving something like $3-5,000 over the course of 30 years. Is it worth all the trouble?
Note that your current lender may give you a deal on closing costs (not require a fresh appraisal since yours is fairly recent) to keep your business–they know you can go elsewhere and while they may like your current arrangement, keeping you is better than you leaving. It’s usually worth a call to your current lender first to see what they say.
t-keela–if you’ve been in your home awhile, you don’t need to refinance to a 30-year loan. 20, 15 and 10 -year terms are all available. If your goal is simply to lower the rate, not take cash out, you may want to take the shorter term.
You also need to see if you have enough equity. I work at a bank refinancing mortgage loans, so I might be able to give you some helpful info.
The company I work for will only loan up to 90% of the home’s value. Other companies may be different, I don’t know.
You will likely have to pay an appraisal fee or somesuch out of pocket. Ours is $400.
Watch what those companies are trying to roll back in. If the company is based in, say, New York, and you are in Florida, that company will charge you out of state closing costs, which can be considerably higher. Sometimes that out of state company can still offer the better deal, though, so be sure to check it all out.
When you’re shopping around, get a P&I quote (principal and interest) and try to get them to tell you what your total monthly payment would be as well (including taxes and insurance). If they won’t/can’t tell you, you can figure it out yourself easily enough. Find out from your current company what your P&I is, and subtract that from your total payment. Then add that amount to all the P&I quotes you get so you can compare apples to apples, and you realize just how much (if any) you’d be saving.
Don’t be afraid to get information, and then turn down the mortgage they offer you. The person on the other end is trying to meet their sales quota, and will probably be very convincing about why you should at least fill out the application with them now. Chances are, rates won’t change much (if at all) in a day or two, or even a week. Certainly not enough to make a huge difference for the amount you would be borrowing.
Most importantly, stick to your guns, and make sure they answer your questions to your satisfaction. If you can’t get a decent answer from them, hang up, call back, and get someone else who hopefully could be a little more straightforward and/or knowledgeable.
My experience:
My home was appraised at $175,000. I bought the house 1 year ago on a 30 year fixed at 6.5% for $190,000 with $40,000 down.
With escrow my payments were $1140.
I just refinaced to a 20 year at 4.75%. The closing costs were added to the loan. I now pay $1185.
In addition I will be getting a refund for my accured escrow $1100, and I will skip a month of payment.
I can use the $2000 plus as and additional principal payment and I come out way ahead.
We refinanced last November, and closed on a second refinancing just this week. We refinanced (both times) through a bank that offered zero-fee, zero-point mortgages. The rate for these is, of course, higher than the standard rate. In the latest case, we got 5.875%, which is still better than your 6.25%. I imagine you can get at or near the same rate right now, so it’s obvious you’ll save. The only question is whether or not it’s worthwhile to obtain a lower interest rate in exchange for absorbing up-front fees.