Neuswanger: All refinances are not created equal
One of the many side effects of the COVID-19 pandemic has been the amount of money flowing into the mortgage markets and the sudden drop in mortgage rates. Mortgage money is raised by selling bonds to investors, most of these are issued by two government agencies, Fannie Mae and Freddie Mac.
Mortgage bonds are considered a safe investment on par with treasury bills, and as such in times of uncertainty investors tend to pour money into bonds, which drives down the cost of borrowing money for bond issuers, and thus drives down mortgage rates. In addition, the Federal Reserve Bank has made a priority of supporting the housing market to stimulate the economy and poured tens of billions of freshly printed greenbacks into the bond markets, further stimulating demand.
But for the homeowner, deciding if a refi makes sense and, if so, which loan program to choose can be a daunting task. The borrower must not only figure out the impact of a lower rate but also the cost of the refinance in deciding which way to turn.
Mortgage loans never are free, but a knowledgeable borrower can work the system to his advantage. For starters, should one take a lower rate with an origination fee, or a higher rate with no origination fee?
For example, a $400,000 today might run at 2.625% but require an origination fee of 1.5% of the loan amount ($6,000.00) and the monthly principal and interest (aka P&I) would be $1,659.00. Alternatively, the borrower might get a rate of 3.0% with no origination fee and a monthly P&I payment of $1687.00. The borrower pays $6,000 upfront but saves $28 per month.
A third option might be a rate of 3.25% with no origination fee and a lender credit toward closing costs of perhaps $2,000.00 and monthly P&I payments of $1,740.00. Between the 2.625 and the 3.25, the borrowers’ closing costs flip downward by $8,000 and his payment goes up $81.
Many factors including loan to value, loan amount, property type, term, and credit score go into determining what rate you are eligible for. No lender has a single “rate of the day” that applies to all loans. Some loans have 5-6 different components involved in calculating them, some lowering the rate and some increasing the rate.
The other factor to consider is starting over on the amortization. Mortgages are typically available in 15, 20, 25 and 30-year terms. You pay off less principal early on and more in later years. If you are more than 4-5 years into your current loan consider a shorter term on the refinance — someday you will be ready to retire and have a nice nest egg of equity in your home. A lender can show you amortization tables on the loan you have and where a new loan would take you in the same amount of time.
When you refinance you face complex decisions, and you need some good solid guidance from a professional. Many times I’ve sat down with clients and reviewed what an online lender has offered them and then shown them a slightly different approach that would save them tens of thousands of dollars over the life of their loan.
Chris Neuswanger is a mortgage loan originator at Macro Financial Group in Avon and may be reached at firstname.lastname@example.org or 970-748-0342. His web site is www.mtnmortgageguy.com.