Refinancing rates - real or fantasy?

lafilmfanSeptember 25, 2009

I'm thinking of refinancing (I'm currently at 5.75). This morning in the paper they are saying that 15 year or 10 year mortgages are averaging 4.41 percent, and the average points are half a point.

So I called the person who did my financing years ago, and the best I could get from him was 4.5 with one point for 15 years.

Is this a good deal, or can you do better? I hate the points and up front costs the most...

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dave_donhoff

Hi lafilmfan,

We're still locking clients on 30 FRMs at 4.25%, and on 5 yr ARMs at 3.75%... but this is only for the clients taht are more conservative and expect to stay-put in their financing long enough for their monthly savings to repay them for the up front costs.

If you prefer to have your actual financing costs buried into the financing, you'll always pay higher interest rates for the long run.

I would definitely *NOT* recommend any 10 or 15 year amortization schemes, *UNLESS* you sincerely predict we'll have no inflation in at least that long into the future. Otherwise... taking a 4.25-4.5% rate for the long haul, and then keeping your cash OUTSIDE of the mortgage bank, will ensure you have it in your control when safe-return vehicles (like bonds, CD's money market funds, and annuities) are back up offering in the teen percentages again.

If you are of the mind that safe return funds will be depressed for many years to come (aka "the Japanese lost-economic-decade argument,) then the 5 yr ARM is the no-brainer choice to take, financially speaking.

Hope that's helpful.
Dave Donhoff
Leverage Planner

    Bookmark   September 26, 2009 at 6:15PM
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sweeby

For what it's worth, I found a lot of "bait and switch" adds for refinancing rates.

I knew my credit scores (800+) and was refinancing at a 60% loan to value, so I could find NO REASON why I shouldn't be able to qualify for the best rate the lender was advertising. After a week of "Oh gee, you should have locked yesterday!" I started calling daily to check the rates -- never anywhere close to what they advertised. Their excuse? "We have to submit our ad copy on Thursday for the Sunday paper." So I said I'd call back on Thursday. Of course, Thursday's rate was no better than earlier in the week, but Sunday's add still claimed fabulously-low rates. I told them it sure looked like a classic "Bait & Switch" tactic and that I'd have to call the paper to complain and find out the proper authority to report them to.

THEN I got the low rate they advertised.

Now I know this is the part where Dave says something about "the best liar" and he's absolutely right! (Thanks Dave - we do listen.) But I DID get my low, low rate and my loan was packaged in with a bunch of others and resold, so it worked out OK in the end.

    Bookmark   September 28, 2009 at 11:47AM
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landmarker

Dave, how could your recommend a 3.75% ARM over a 4.25% FRM, justified by the assumption that inflation will increase? If inflation goes up (along with it salaries, loan and savings rates), a person locked in at 4.25% on "Today's" dollars will be very happy.

Are there data points that have CD rates > Mortgage rates at a point in time?

    Bookmark   September 28, 2009 at 12:14PM
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dave_donhoff

Hi Landmarker,

Dave, how could your recommend a 3.75% ARM over a 4.25% FRM, justified by the assumption that inflation will increase?

Well;
A) One size doesn't fit all... I would recommend the 5 yr ARM at the lower rate and lower entry costs when the client's scenario is such that they have reasons to believe they'll either be accelerating their paydown, and/or they'll be selling prior to a likely critical 'break-over' point in accumulated interest costs, and/or they have foreseeable future events at which they're likely going to want to re-balance their portfolio equity (and thus are likely to need another refinancing.)

B) While it is absolutely inevitable that inflation will increase... the growing question is *how long until*? From many perspectives, we appear to be taking the same interventionalist steps Japan had taken to nail themselves into a zero-rate, zero-growth economy for over a decade. Its very much still anybody's guess as to when these cows are going to be coming home to roost (I love mixing metaphors ;~)

If inflation goes up (along with it salaries, loan and savings rates), a person locked in at 4.25% on "Today's" dollars will be very happy.

You're singing in perfect harmony with me here (are spying in my shower?)

Are there data points that have CD rates > Mortgage rates at a point in time?

Doubtlessely... of course, we can only guess WHEN that will occur.

Historically, we can look back at when 30 FRMs were in the low 4%s (and even in the 3%s) and then "run forward on the calendar" to when safe-return vehicles (CDs, Treasuries, Bonds, Fixed Annuities) were paying more than the costs of the mortgage money already in place (sometimes 5-8 TIMES the costs of the mortgage money)... but that's rear-view mirror predicting...

That it WILL again occur is beyond argument (in my opinion... naturally that won't prevent arguments here though ;~) The $64,000 question is *WHEN*?

Cheers,
Dave Donhoff
Leverage Planner

PS. Sweeby... you made my day! Hope you're a girl, cuz I'm blowin' you a kiss.

    Bookmark   September 28, 2009 at 12:43PM
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lafilmfan

I would take an ARM if it lasted longer than five years. If it was, say, seven years I'd do it. The problem in my eyes with a 5 year ARM is it's too risky after those five years are up. You'd possibly be losing any savings you might get from refinancing.

But, what ARE the typical closing costs? I think for my 200K mortgage refinance they were saying about $4700. That seems kind of high for me.

And on a related note, is there a way to refinance with the bank that already holds your mortgage? It wouldn't be in their interest to make less, well, interest on the loan, but it would be even less in their interest to lose the loan to another bank.

    Bookmark   September 28, 2009 at 1:20PM
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cordovamom

lafilmfan-- we refinanced a year ago with our original mortgage holder at 5.5% for 15 years. We received a letter from them a few weeks ago offering to refinance at 4.25% for the same 15 years for 105% of the home's value! Our bank offers to waive about $1000 in fees if you refinance with them, and we did so a year ago, but wonder if we couldn't have gotten a better deal on closing costs elsewhere. We refinanced less then 200K and our refinance costs a year ago were about $3500-- after they waived some fees.

    Bookmark   September 28, 2009 at 2:30PM
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dave_donhoff

Hi lafilmfan,

The problem in my eyes with a 5 year ARM is it's too risky after those five years are up.

If you're only looking at the risks of rates rising at the highest & fastest acceleration (and they STAYING that high,) you fall prey to the risks of over-paying interest in all the other cases when interest rates do something else... like stay low, or rise a little & drop back a little, or rise a lot, drop back a little, and stay put, etc. etc. etc.

Paying too much interest simply to take a 30 FRM isn't necessarily the best (nor cheapest) way to avoid interest rate market risks.

You'd possibly be losing any savings you might get from refinancing. But, what ARE the typical closing costs?

If you are able to see the naked, fully-transparent, actual costs of all the services & personnel involved in a typical mortgage file, it normally runs about 3-5% of the loan amount, with a minimum in the $5,000 range.

I think for my 200K mortgage refinance they were saying about $4700. That seems kind of high for me.

You're used to seeing fees after the industry subsidizes the costs by raising the offered interest rates. MOST of the unaware public focuses more on what they see in immediate fees than the effects of a few basis-points higher in interest rates... so the banking sales industry plays a lot of "shell game" numbers tricks to make things look cheaper than they really are.

And on a related note, is there a way to refinance with the bank that already holds your mortgage? It wouldn't be in their interest to make less, well, interest on the loan, but it would be even less in their interest to lose the loan to another bank.

Sure! Just apply with them again, same as you did the first time. You can always REQUEST a loan modification, rather than a straightforward refinance (which comes with the inescapable transaction cost burdens,) but if you have good credit your prior loan was doubtlessly sold on the secondary markets anyway, so you'd have no choice but to get another ticket for the financial merry-go-round joyride we all know as the mortgage application terror... err, process, I mean.

Luck!
Dave Donhoff
Leverage Planner

    Bookmark   September 28, 2009 at 2:31PM
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