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Time to Refinance .... Again?

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I remember a conversation with a colleague of mine a couple of years ago, when mortgage rates were steadily dropping to historic lows. At the time, she had an unbelievable rate of 4.25% on her 30-year mortgage due to a first time homebuyer promotion in the area she purchased her home. We all joked around and said that she’ll never get the chance to refinance because her rate was so low.

Shockingly, we were all proved wrong when my colleague’s bank offered to refinance her mortgage to an even lower rate a few months ago. Just when everyone thought mortgage rates have hit a new low, it has continued to surprise us. I’ve worked with several clients who refinanced just a couple of years ago and are now refinancing again!

Perhaps you’re also thinking if it makes sense to refinance your mortgage in today’s environment. After all, it’s hard to pass up the opportunity to lock in a 30-year fixed mortgage rate of 3.25-3.50% or a 15-year mortgage at less than 3.00%! Having recently gone through and am still going through a frustrating refinance, I thought I’d share a few thoughts on the topic that may help you in your process.

Make sure the numbers add up. Since there are upfront costs associated with refinancing your mortgage, you should make sure that the money you’ll save with a lower interest rate more than offsets the upfront costs. For example, if the total cost of the refinance is $6,000 (which includes expenses such as appraisal fees and attorney fees), and your payments will go down by $200 each month, then you will breakeven in 2.5 years after the refinance. This means that if you do not plan to stay in your home for at least another 2.5 years, it doesn’t make financial sense to refinance because you won’t save enough money to recover your $6,000 upfront cost.  Note: The above example does not take into account the time value of money. If you take the present value of your future money savings, you will need to stay longer than 2.5 years to break even.

Research recent home sales in your area. The primary reason that I still have not yet refinanced my 5.875% mortgage while rates have been dropping is due to the appraisal hurdle. Generally banks will not lend out more than 80% of the home value, and if the current value of your home has dropped from the original purchase price, it’s possible that you’ll have to put up more equity in order to refinance. If you’re not in a position to do so, and your research shows that comparable home sales in your area are not favorable, it may not make sense for you to start the refinance process and spend money on bank fees and appraisal fees, only to find out that the appraisal came in too low.

Check with your current mortgage provider. Ask your current mortgage provider if there are any benefits or promotions if you choose to refinance with them. Since you already have a mortgage with them, it’s more likely that the process will be faster because they have all of your previous information on file. In addition, you might be able to save money on closing costs by working with the same bank. My colleague who recently refinanced was offered a special promotion to refinance with her existing bank with no appraisal or closing costs, and the process was completed in a very short time frame. While these situations are very rare, they do exist and it doesn’t hurt to ask.  

It’s not just about the lowest rate. In an ideal world where every bank is efficient, organized and accountable for the actions of its employees, then of course, choose the bank with the lowest interest rate. Unfortunately, I learned my lesson the hard way. I started my refinance process with a bank that offered a very low rate in May of this year – yes, it’s November and I have yet to close on the mortgage. Let’s just say it has been one of the most inefficient and disorganized business transactions I’ve ever been a party to, and to top it off, at our attempted closing a few weeks ago, the bank had incorrect documents so the attorney had to adjourn the closing. Looking back, I would have gladly paid a slightly higher rate for a better experience. Most people that I talk to have had similar horror stories dealing with banks. I strongly advise you to ask around for a recommendation of a bank or mortgage broker who is responsive, knowledgeable and takes responsibility for their actions. Even if their rate is not the lowest, saving you hours of time, headaches and frustration just might be worth it.  

I wish I could tell you that now is best time to refinance because mortgage rates are at historic lows and will only go up from here, but we’ve been saying the exact same thing for the past few years. Just like the stock market, no one can predict the ‘bottom’. What I do know is that rates really are low right now, and if you can lock in at today’s rate and save money over the long term, it’s not worth trying to wait for the lowest rate possible. Good luck and happy refinancing!

Note: I am scheduled to close on my refinance (again) this Friday.