Neuswanger: How much does a refinance cost?
Mortgage rates are currently at about three-year lows, and in some cases even lower. Recently the 15-year fixed rate went into the upper 2 percent range. This has led many to wonder if a refinance of a mortgage makes sense.
The old adage of having to lower your rate at least 1% to make it worthwhile is really just an old wives’ tale. There is a complex mix of calculations one should get professional advice on before just grabbing the lowest rate out there.
All mortgage loans have closing costs, and these fall into hard costs such as the appraisal, title, credit, underwriting and filing fees. For most loans, these costs will run about $3,000. Then there are soft costs, which include opening escrow for taxes and insurance and depending on what day of the month you close, prepaid interest through the end of the month.
If you close on say, September 20, you will pay interest forward for the remainder of September and not have a house payment until November. Soft costs are basically money you would end up spending on taxes, insurance and interest regardless of whether you refinanced or not. If you currently have an escrow account you will get those funds back from your current lender in about 30-days
In addition, depending on the interest rate you choose, you might pay a discount fee to get a lower rate or a lender credit against your hard and soft costs if you choose a higher rate. The lender credit can fluctuate several times a day until a loan is locked in and is one thing a borrower needs to scrutinize carefully when comparing loan offers.
The trick is to do the math and find the most beneficial combo of rate and cost or credit that makes sense. Rarely do people pay to buy down a rate as it seldom makes economic sense these days, but you should have a professional run the numbers both ways and show you your breakeven point.
In some cases, it may make sense to start off with a 15-, 20-, or 25-year term versus starting over on a 30-year. The way loans amortize off is you pay very little principal for the first few years and more in later years. Your payment will be higher with a shorter-term loan but you will build equity quicker. Typically the rate is lower on a 15-20 year term, although that spread is tightening with the recent irrational activity in the bond markets.
Right now, myriad hot spots in the world economy will make for wide swings in interest rates over the coming months. The riots in Hong Kong present a substantial threat to the Asian economy as do tariff and trade wars. The United States’ trade deficit is growing at an alarming rate and inflation is up. Depending on what forces win out either mortgage rates could go down further or they could spiral upwards on a moment’s notice either way.
Chris Neuswanger is a mortgage loan originator with Macro Financial Group in Avon and may be reached at 970-748-0342. He welcomes mortgage-related inquiries from readers. His website ishttp://www.mtnmortgageguy.com