Waiting For a No Cost Mortgage Refinance

Ever since late last year, there have been numerous news reports about the mortgage rate going to 4.5% or the mortgage rate reaching historical lows. The headlines read Treasury mulls plan to lower mortgage rates to 4.5% (CNN, 12/4/2008), Mortgage Rates Fall to Another Record Low (Fox, 4/2/2009), and so on. Then how come I still can’t refinance my mortgage?

I kept asking my trusted mortgage broker about refinancing but he kept telling me “rates are not yet lower than what you have now.” In case he’s no longer able to get competitive rates because the banks are cutting off mortgage brokers, I also tried getting rate quotes myself directly from the banks.

Pentagon Federal Credit Union (PenFed) used to have good rates and no lender closing cost. Now they added a 1% origination fee on all their fixed rate mortgages. That totally killed the deal. Right now I can see 4.5% rate from a few places but they all require about $3,000 in a combination of points, fees, and closing cost.

When you evaluate whether paying the closing cost on a mortgage refinance is worth it, you shouldn’t just compare your current loan with the refinanced loan. You should use a no cost refi as the baseline because you are able to get it anyway.

For example, suppose you have a loan at 7% and the current rate is 5% with a $3,000 closing cost. If you run the numbers through the mortgage calculator, you see you are able to save money over the expected life of your loan, and therefore you conclude that paying the $3,000 makes sense. But wait, if you are able to refi to 5.25% with no cost, you should really compare the 5.25% no cost refi with the 5% plus $3,000 closing cost and see which is better.

I locked in the rate for my last refi in January 2008 at 4.875% for a 15-year fixed rate mortgage. That was two months before Bear Sterns collapsed. Way before Lehman went bust. S&P 500 was 1,300 back then (now 870, lowest 666 in March 2009). 10-year Treasury yield was 3.4% (now 2.9%, lowest 2.2% in January 2009).

You would think with the stock market down, bond market up, the mortgage rates would be down significantly. Yet the mortgage rate never came down low enough for me to refinance. I ran the numbers with the Mortgage Professor’s refinance calculator. I see I’m able to save a whopping $85 over 10 years if I pay $3,000 in closing cost and refi to 4.5%. It’s just not worth it.

So I’m still waiting. If I’m able to get 4.5% with no closing cost, I’ll do it. I still want to do a no cost refi because for my circumstance, the bottom line cost between a no cost loan at a higher rate and a with-cost loan at the lower rate is negligible ($85 over 10 years).

Why are rates not down? I think the banks want higher margins now than they did before. The rate at which they can sell the mortgages to Fannie Mae is down, but the rates to borrowers are not down nearly as much.

[Updated on April 27, 2009: Found a place offering the rate I wanted. Refi journey started.]

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Comments

  1. Ted says

    TFB – I have had mortgage brokers tell me that no closing cost loans are over (for now). Once the federal government began backing the loans, the margins banks were able to pay brokers dropped drastically. Normally if the par rate was 5%, a broker could make 2.5 points in yield spread from the bank for charging a rate of 6%. Now, if the par rate is 5%, 6% may only pay 1.125 points. Closing costs are normally 2%-3% of the loan amount, so now brokers just can’t make enough to cover closing costs.

  2. TFB says

    Ted – Thanks for the info. If that’s indeed the case, it’s too bad. Paying the $3,000 closing cost doesn’t make sense for me yet. I will keep waiting and tracking the rates.

  3. Raghu says

    TFB – I have 5.25% No Cost Loan since Dec 2008 and I was actively looking to lower the rates.

    Yesterday one of broker called to offer 4.875% with (.125%) Escrow waiver fee; No Cost loan. It would lower monthly payment by $65.

    I’m still thinking if I can take that offer for now or wait for the another rate dip. My instinct says – go for it. Any suggestions?

  4. TFB says

    Raghu – Is that for a 30-year fixed? I can’t predict where the rates will go. In the past I followed the “stepping down the ladder” method. Whenever the rate dropped by 0.25%, I refi’d with a no cost loan. My only cost was the time spent on filling out some forms and signing some documents. If there’s really no cost, I don’t see any reason why you shouldn’t do it. I would try to negotiate away that escrow waiver fee. If the broker is making money from the refi, he/she can certainly cover it. Can you e-mail me your broker’s contact info? If they can do 30-year at 4.875% for you, they should be able to do 15-year at 4.5% for me.

  5. TReido says

    Raghu – If that no-cost refi is for a 30yr please do share. I’m in Texas and am in the same boat as TFB on crunching the numbers to make a no-cost refi work for me. Thanking you in advance for sharing!

  6. Raghu says

    Chris Murray – cmurray at cimginc dot com
    Office: (919) 676-1111

    Let him know I referred you guys.

    4.875%; .125% Escrow Waiver Fee. I’m still trying ti get the escrow fee waived. If you happen to be successful, let me know.

  7. TFB says

    Raghu – Thank you so much for sharing. Too bad I don’t live in the states CIMG is licensed in. You mentioned National Mortgage Alliance on your blog. Their rates are the lowest I see so far. Not quite no cost for 15-year at 4.5% yet, but close.

  8. Jamie says

    Thanks for writing this post up. I also have a very low cost mtg 4.75% (15 yr) for many years and have been waiting for a no cost refi. Although, from your post, it sounds like I may have to wait some more. Please write update if you find other low cost refi.

    As always, you keep on bringing up topics that are on my mind :)

    Thanks

  9. Cynthia says

    I want to refinance to get a lower rate, pay no fees, pay off my van payment, and take a trip to Denmark.

    The problem is, we only own $13,200 on our current mortgage, so paying any fees at all is not really worth it.

    I found this post through a google search… I’ll look through your blog some more. :)

  10. K3 says

    I obtained a no-cost refi @ 5.125% through National Mortgage Alliance recently. The deal did get done in the end but the experience wasn’t the smoothest. The loan was immediately sold to Bank of America, to whom I am now making payments.

    Given the recent continued drops in rates, I could obtain a 4.75% rate through NMA if it weren’t for a BoA imposed rule that NMA can’t refi a client again within 120 days of closing, at least not without paying back the commission BoA paid NMA, which of course spoils the deal. I am hoping that either the rates keep dropping or hold out until I’m eligible for another reapplication to refi or else I can locate another lender through whom I can obtain the same kind of deal. Unfortunately, I haven’t found anyone else who will openly and immediately quote no-cost refis the way NMA will on its website without submitting any personal info. In fact, I cannot find anyone who really even clearly advertises no-cost refis.

  11. TFB says

    K3 – If I were in your situation I would take a chance on AmeriSave or another up-front mortgage lender or broker. These mortgage banks and brokers all work from the same offers put out by the wholesale lenders. NMA is hardly the only game in town.

  12. kerry says

    so far all these lenders charge closing costs. Even Fremont Bank, although they disguise it as ‘refundable fees’. I’d see that in writing before handing over my VISA number.

  13. Tim Tysyachuk says

    I know Wells Fargo offers a no closing cost refinance. They have a three-step-express program for existing customers. You can google my name and give me a call if you want, I can tell you a little about the program. Good luck!

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