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.]