There’s an old rule of thumb that if you can refinance at an interest rate 1% or more below your current rate, it’s a good deal. That advice is too broad and may not be true in many circumstances. It doesn’t take into account so many factors like how far into the current loan you are, what the transactions costs are (they vary widely by state and financing outfit), what your future plans are for moving. Taking this a step further though, with record low mortgage rates, many people are jumping from 30 year loans into 15 year loans. This begs the question as to what the right interest rate spread is if jumping from a 30 down to a 15 and my assessment is that the spread must be MUCH wider than 1% to make sense – or in many cases, it doesn’t make sense at any interest rate! While it’s admirable to seek to pay down your loan quickly, it’s a move that may not provide any benefit while adding risk to your financial situation. Here’s Why:
Continue Reading: Even at 3.25%, Refinancing Makes NO SENSE! Here’s Why
Excellent info Darwin. The only thing I may point out is there are still some older loans with pre-payment penalties, check that contract (or do yourself a big favor and talk to a contract lawyer) to make sure. The banks have teams of lawyers on salary that create these twenty page monstrosities with contracdictory verbiage and lots that may be vague enough to benefit the banks that own the judges. More reasons to just double down on your payments versus signing up for a new contract.
For a good many of us, there is no option to refinance so the low rates matter not at all.
Well, they don’t matter to me personally, but on a country-wide, future tax burden on us all it matters.
A 3% interest rate doesn’t even cover the current default rates, which means that all this is will do is extend the banks times to pretend everything is ok.
Converted from 30 to 15 almost 8 years ago. Decided to make a bigger payment at a lower interest rate…would save me tens of thousands in interest payments. Just refi’d again for a one point drop…zero cost…gives me air cover in case I have to succomb to a lower payment. Making the same payment I was making before on the higher rate loan, YUP, I will still be on track to pay that sucker completely off in 7 years (the original 15 year plan).
So how was that not a good idea? I won’t owe those pig banks a fucking dime in 7 years. Smoke that.
Centerfield…Keep at it. I haven’t owed “pig” banks anything for about 20 years. Not being in debt when a credit bubble bursts doesn’t hurt as much.
A lot depends on the rate you’re coming from. I already have a 4.625% on a 30 which isn’t too shabby. The title fee alone is like $4k here which is absurd. Many people blindly do a refi without scenario analysis. In my particular case, even though a 3.25% sounds incredible, it isn’t.
I rent. With 30 days notice I’m outta here. No interest, no prepayment penalty, no points, no bankers. I am free. And loving it.
I have no intention of ever owning again. Ever. Anywhere.
Refinancing depends on your situation. If you bought at the peak of the market and are struggling to meet the repayments on a house that is underwater to the tune of $100,000 + then walking away is in fact your best bet, especially if the loan is non-recourse.
Heck, even declaring bankruptcy and using the courts to shaft your creditors may be a better option than refinanciing, again depending on circumstances.
Yes, record low interest rates are really attractive incentive to re-fi.
But home-owners need to be aware of a trap that is being laid by TBTF…
I’ll try not to bury the lede..
Over 100 million mortgages aren’t mortgages at all, but unsecured debt. A debt is owed, money was borrowed, but it is not secured to real property.
So a home-owner is trading in unsecured debt, for a new loan, which is most definitely secured. This applies to all borrowers whose loans originated from 1995-2008.
Why is this important?
When TBTF are broken up, and civil penalties awarded to home-owners who were damaged by MBS scheme are doled out, those home-owners who re-fied may not be eligible for awards.
Also, when the perverbial s@#$ hits the fan, global economy collapses, those home-owners with unsecured home loans will be able to shed their debt in bankruptcy (since the home loan was not secured to a mortgage).
Or, the home-owner can now challenge the identity of their creditor and file a Quiet Title Action. (No mortgage is owed, since the identity of true creditor is unknown. The home-owner grabs title, free to live, sell property).
The only mortgages TBTF have written since 2008 are re-fi’s. It’s how they are getting signature of home-owner on a new contract, since previous mortgage contract is void (TILA, RESPA)
These people are evil…but people need to know and understand what we are dealing with so they can make an effort to protect their private property.
Dave, when the credit bubble bursts I fully expect inflation, even hyper-inflation to kick in. So our dollars will be worth less.
My payment won’t change at all. So my plan, kinda like the Federal government plan, is to wait for me to have more $$, just more worthless ones for purchase of foreign goods, not American debt. Will make the loan(s) easier to pay off. The only way this wouldn’t work is if you have a variable rate loan, which I don’t. Also, as a business owner, I have to keep in mind that a paid for house is an asset that a lawsuit could take away. As long as you hold a debt on it, most lawyers won’t recommend going after it. The mortgage, just like a lien on your car, makes it impossible for the government to take it away, I’m really not the owner, the bank is.
The way my plan differs, is that I fully intend to use the devalued dollars to get out of debt completely, the fed however has no plan to ever spend less than they take in. No plan at all.
Marissa, renting would scare me as the costs can be very variable. As inflation kicks in, rent goes up to cover the increases in taxes & maintenance for the owner.
I know what my payment will be in ten years, that gives me some peace of mind.
But I understand why you could be soured on housing, we really screwed the pooch on that one!
With the current housing overhang, having been foreclosed on, in foreclosure or just abandoned, the housing market will not recover in my lifetime. The overhang of empty houses and commercial property is about 10 years worth of inventory and a house will hang on your neck like an anchor until it is cleared.
The worst aspect of it all is that, being unable to sell your house, it nails your feet to the floor making it impossible to move to where the work is.. There is _always_ work, one just has to go where it is. Unless you just walk away from your home, there is no way to free yourself from the anchor it represents.
I suspect our unemployment rate (now 23% and climbing as figured in Clintons’ time) would drop by 5-6 points or more if people could easily up stakes and go where jobs exist.
@TE: as far as inflation and rent, a landlord can only ask what people can pay, even if it means he eats the taxes and such for years. Seen it in 1958, 1967, 1975, 1983, 2002 and now. The only reason most people buy is to build up equity in a home. That goal is a dead horse and will be for the next 10 years except by doing it one way.. Build your home yourself, be your own contractor, own the land free and clear, live in a bloody tent if you have too, but do it yourself.
That way, there is no way to loose. Every hour you spend banging nails, shoveling dirt, laying shingles, doing plumbing, electrical and interior finish is worth $400 an hour when or if you decide to sell it. Been there, done it four times.
Otherwise, for the next ten years, rent…
MA
@MA, ah, but you forget the power of the federal free shit.
Federal rents will keep up with inflation, because they have to keep their core voters and contributors well stocked.
We are seeing it in Michigan, private owners switching to HUD approved to get Section 8 and better pay.
The working poor that refuse government “help” can’t pay as much as Washington.
Just like with private housing, education and a thousand other things, Federal Free Finance = Grossly Inflated Prices.
The insanity will only grow until it completely dies.