How to Take Advantage of Historically Low Mortgage Rates

RefiMortgage rates for 30-year U.S. loans dropped to the lowest level EVER and that’s pretty big if you got your last mortgage sometime prior to 2016.  In March, the average rate for a 30-year fixed mortgage was 3.29 percent, down from from 3.59 percent last month.  However, mortgage rates, like everything else in the market, is experiencing extreme volatility — so timing is everything.  As of March 2020, mortgages are largely unavailable because mortgage lenders have issued a short moratorium.   Despite the expected mortgage market volatility, it looks like the mortgages may drop even further later in 2020 to 3% or below — hitting levels not seen, let alone imagined, in most of our lifetimes!  (Sadly, it may also be presaging a long recession)  So is a mortgage refinance worth pursuing right now?  And will it be worth the costs and hassle of refinancing?   Read on:

Keep in mind that mortgage rates were supposed to go up in 2020, but instead they have tumbled since the start of the year as concerns of a slowing global economy drove investors to the safety of the government bonds that guide consumer debt.  (We explain the complex economic dynamics at our on-going economic blog).  Because mortgage rates generally follow the direction of the 10-year Treasury note’s yield, which have been hitting new lows as well, we expect mortgage rates to may continue to drop.   So, if you were ever going to refi, this is definitely the time to investigate.  However, if you choose to refinance, you must beware of some of the costly traps laid by unscrupulous mortgage finance companies.  At the conclusion, we’ll recommend some mortgage companies that you might want to consider.

WILL A REFI SAVE YOU MONEY?

The old rule of thumb is that you shouldn’t refinance unless you can get at least 1% less on your interest rate. Except that’s not always true. The fact is that there are occasions where a reduction in rate of even a quarter of a percent can provide benefits. Do the math and find your break-even point to see when you’ll be saving money, and match that with how long you plan to stay in the home.  We recommend this mortgage calculator to figure out whether a refinance is worth considering. Last, you could have locked a 30 year fixed rate mortgage at around 4.125% without paying any discount points. Today, the same loan will be 3.525%–that’s a 6/8% lower rate.  For a loan of $400,000, for example, with a rate of 4.125%, dropping your rate to 3.25% will cut your monthly payment by close to $600 a month. You’d save over $12,000 in the first five years–more than recovering the cost of doing the refinance.

However, before you make the decision to refinance you should consider accelerated payments, as an alternative.  In other words, rather than creating a new loan (with its attendant costs), you can simply increase your monthly payments and accelerate the payment of your principal.   If you are more than four years into your 30-year loan, you may want to use this comparison calculator to determine whether refinancing is any better than simply paying down more of your principal.   One of the factors that many people don’t consider is that by reducing the interest rate you pay also impacts the size of your tax deductions.   By continuing to pay the higher interest rate (thus, getting larger annual deductions) but paying off more of the principal, you may get the best of both words.    It turns out that, in many cases, accelerated payments is financially superior to refinancing — especially if the interest rate reduction is significant.  By increasing the payments of an existing loan, you effectively achieve a faster pay-off at much less cost without having to go through the cost and effort of arranging for a refinance.

THE NEED TO COMPARISON SHOP

If you decide that a refi makes the best sense, remember that you can’t successfully refinance without comparison shopping.   Get on the Internet and compare rates/brokers.  You won’t know if you don’t try, so beat the procrastination by first contacting some lenders and getting terms. Get good faith estimates from at least two or three lenders before moving forward.   Comparing loans of different lenders is often the most difficult part of mortgage shopping. Firstly, it is important to keep in mind that mortgage packages consist of more than interest rates. They consist of a quoted rate, points and closing costs.  Points are an up-front fee paid to the lender at closing. Each point equals one percent of the loan amount. Points are charged, or paid, to lower or increase the rate on the loan. Most lenders will allow you to choose among a variety of rate and point combinations for the same loan product. Therefore, when comparing rates of different lenders, make sure you compare also the associated points.

When comparing lenders it is important to compare loan related fees (i.e. the fees which lenders charge to process, approve and make the mortgage loan), since the other fees are typically independent of the lender. Remember, each of them will have slightly different terms and conditions.    One to watch for:  insurance requirements.   Increasingly, lenders are requiring rather onerous homeowners insurance to ensure the preservation of the asset against which they are lending.  Some of the mortgage brokers will require insurance levels that far exceed the value of your home, driving your homeowners insurance costs up.   So be alert to this requirement and ask any possible lenders about their insurance requirements.  Some good online resources at which to find mortgage lenders include Bankrate and Trulia.  The Consumer Financial Protection Bureau is also an excellent source of credible information and it offers an interest rate comparison tool.   We did some searching for low-cost online brokers and found E-rates, Better and Nation’s Choice to offer fairly competitive rates.   We were especially appreciative of the knowledge and integrity of Nation’s Choice consultant Glenn O’Toole.  He seemed committed to finding the best option, even if it didn’t involve refinancing.

BEWARE OF THE APR

Most every mortgage offer will be couched in terms of the “rate” and the “Annual Percentage Rate” (APR). The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. It is designed to represent the true cost of the loan to the borrower, expressed in the form of a yearly rate, which was hoped to prevent lenders from hiding fees and upfront costs behind low advertised interest rates.   However it hasn’t quite worked out that way.  Even lenders admit the APR is confusing since  it includes some, but not all, of the various fees and insurance premiums that accompany a mortgage. The rules for calculation of this number have not been clearly defined, so APRs vary from lender to lender and from loan to loan, depending on which types of fees and charges are included.

We do not recommend relying upon the APR as an indicator of a loan product’s value. The APR calculation is based upon the assumption that you keep your loan for the entire period of the loan, say 30 years, which in reality may not be the true hold period for a borrower. In addition, the APR model is flawed in that when a product is variable and tied to an index, the index is assumed to never change. This obviously is an invalid assumption that can lead again to a number, which in fact can not be compared, from one quoting source to another. Finally, the APR won’t tell you anything about balloon payments and prepayment penalties and  how long your rate is locked for. So a loan with a lower APR is not necessarily a better loan. You can use APRs as a guideline to shop for loans but you should not depend solely on the APR in choosing which loan is best for your needs, it is important to look at other factors.

CLOSING COSTS

Closing costs is another big issue that you should deal with upfront with any prospective lender/broker.   Closing costs typically consist of loan related fees, title and escrow charges, government recording and transfer charges and can add thousands of dollars to the cost of your loan — they usually run 3% to 6% of the loan amount. Lenders may finance these costs (that is, fold them into your loan amount), so you don’t actually have to write a check, but you’re still paying for it.  Ask about a zero-closing cost refinance, as it is exactly what it sounds like — it’s a refinance in which zero closing costs get charged to the borrower.  In this case,  costs are paid by the lender. The lender pays these costs as part of deal in which you, the borrower, agrees to accept a slightly higher mortgage rate than for which you’d otherwise qualify. As an example, if your quoted mortgage rate with closing costs is 3.75%, your mortgage rate without closing costs may be 3.875%.  Not only do you need a solid down payment for a home purchase, you’ll have to pay closing costs. The loan estimate you receive after applying for a mortgage gives you an idea of the “cash to close,” or the money you need to complete the transaction. There are some closing costs for which you can shop and save money, and others that are fixed.  Read Bankrate’s primer on negotiating closing costs for more tips.

The trick is to look for a loan that rolls the closing costs into it or settle for a higher interest rate for a rebate to reduce or eliminate closing costs. So if you have $3,500 in closing costs on a $350,000 refinance with an interest rate of 3.5%, you could be able to accept a higher interest rate of 3.75% and receive a 1% rebate of $3,500, wiping out your closing costs.

REVERSE MORTGAGE

If you are a senior and are considering a reverse mortgage on your home……DON’T DO IT!  At least, don’t agree to a reverse mortgage before reading about the dangers of this mortgage “product”.   The Consumer Financial Protection Bureau offers a good summary of the misleading nature of these mortgages.  Suse Orman explains how reverse mortgages often work out very poorly for seniors.  Consumer advocate Clark Howard gives you the skinny on why these mortgages are huge gambles by seniors and should be used only as a last resort.   The bottom line is that a reverse mortgage is probably the best way to lose your home — just don’t do it.

SOME MORTGAGE COMPANIES TO CONSIDER

Nations Choice Mortgage –  Little known, but has some of the lowest mortgage rates in the country.   We recommend you contact senior loan officer Glenn O’Toole, a straight-shooter who knows the markets well.   (glenno@asmartloan.com)

Blue Home Loans – A California-based mortgage broker with access to some low-cost lenders.

Ally –  A decent online bank with competitive loan rates.

NBKC Bank –  Another online bank with very competitive rates and good customer service

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