Best response to the market swoon? Refinance
How should you handle the recent beat down of share prices? It may seem counterintuitive, but about the only thing you should do in its wake is consider refinancing your mortgage.
Wall Street's recent plunge sent investors scrambling for safe havens, leading many to buy U.S. Treasury securities. When that happens, Treasury prices rise and yields fall. And because 30-year-fixed rate mortgages are tied to the yield on 10-year Treasury bonds, mortgage interest rates dropped precipitously along with Treasurys.
Over the past week, average rates on a 30-year-fixed mortgage, with no points or fees, fell 0.3 percentage points to 3.97 percent, says Keith Gumbinger, vice president of HSH Associates, a mortgage tracking firm.
A 0.3 percentage point decline in rates will save a person with a $400,000 loan about $70 a month, cutting the payment from $1,979 to $1,909. But many borrowers who financed homes earlier in the year are likely to enjoy greater savings. That's because average rates were pushing 4.7 percent near the beginning of 2014, says Gumbinger, so these homeowners could save twice as much by refinancing at today's lower rates.
"If you bought a home six months ago -- or were unable to get the best rate because you didn't have enough equity or your credit rating wasn't perfect -- you have another opportunity to get your loan down to historically low rates," says Gumbinger.
It's worth mentioning that in years gone by, lenders suggested that you wait until rates dropped by one percentage point or more before refinancing because it would take time to recover the points and fees most borrowers paid up-front. However, loan rates and fees have become more transparent and have largely declined over the past few years.
Better yet, no-point/no-fee loans are now easy to find. When lenders cover the cost of everything, including appraisals and title insurance, the only issue borrowers need to consider is whether their monthly payments will be lower.
However, borrowers still need to ask copious questions -- and carefully read loan documents -- at the start of the transaction to ensure they're truly getting a no- or low-cost deal. Lenders must provide good-faith estimates of cost at the beginning of the transaction. Make sure you understand the statement.
And if a lender says some fee shown on the statement will be waived in the final transaction, make sure to get the promise in writing. If a lender's fees deviate substantially from what it has projected, the lender can be reported to federal regulators.
Borrowers can also "buy-down" their rate by paying fees. Nations Choice Mortgage was offering a 3.625 percent rate -- monthly payment $1,824 on that $400,000 loan -- to those willing to pay $1,495 in fees, for instance. (Those, however, are likely the lender's fees. Borrowers could expect to pay another $1,000 in title insurance and other costs.) That beat the best no-cost 30-year mortgage rate on Bankrate.com by 0.375 percentage points.
How do you decide between a lower rate and lower fees? Consider how long you intend to stay in the home. The longer you plan to stay, the more compelling the promise of the lower-rate loan.
The difference in cost between the payment on the Nations Choice loan and the same amount on a 4 percent, no-cost loan by Mortgage Capital, for example, works out to $86 a month. A borrower would have to maintain the Nations Choice loan (assuming $2,495 in total costs) for at least 30 months to break even after paying costs.
It's also worth mentioning that those able to make higher monthly payments can save even more by securing a 15-year mortgage. The best no-cost, 15-year, fixed-rate loans shown on Bankrate.com on Friday offered a 3 percent rate. However, because these loans require borrowers pay off the principal 15 years faster, the monthly payment on a $400,000 mortgage is $2,762.33.
Still, those who have the ability to swing that extra $1,000 per month will save a fortune over the life of the loan. The total cost of the 15-year, $400,000 mortgage is $497,219. The 30-year loan with the $1,824 monthly payment (and $2,495 in fees) costs $659,135 in total.
