I'm on a mission to help encourage as many people to refinance in American as possible. I get nothing in return, just the satisfaction of trying to help others save money.
Lots of people have mortgages, but most people are not a rate hawk like me. Thus, I'm here to give you a nice kick in the pants to save some money every month for the next 5-to-30 years of your life.
Nobody gave me a kick in the pants when I locked in my refi. Which is why I had to pay 0.125% higher than I should have. I was unsure and waited a little too long.
Banks have promotions all the time. Your duty as a borrower and saver is to identify which banks are offering the most attractive terms at any given moment.
I've had great results with Citibank and Wells Fargo. They've had mortgage rates often 50 basis points (0.5%) cheaper than other competitors for 5/1 and 30-year mortgage products.
Citibank and Wells Fargo on a rampage to build up their loan book again. As patriots, it's our duty to spread the word and make sure we don't fall off a cliff again!
The Biggest Hurdle To Refinance In America
I've spoken to several people who are having a difficult time refinancing simple due to the LTV loan-to-value ratio of their house. For those who don't know, banks generally have a maximum LTV now of 80%.
In other words, if you have a house worth $1 million dollars, you can not borrow more than $800,000 ($800,000 / $1,000,000 = 80%).
A LTV of greater than 80% is viewed as too risky in this more conservative day and age. Banks may still lend you money to refinance in America, but at a much higher rate than you may like.
Many areas of the US have experienced over 13 consecutive months of year over year increases in housing, but values are easily 10-20% lower than the peak.
In the example above, your loan to value percent rises to 100% if your house value falls 20%. This is because a mortgage of $800,000 equals the value of your house. In this scenario, what are you going to do to take advantage of these blockbuster low interest rates?
Lower Your LTV Ratio And Refinance
If you love your home, and plan on staying in it for a long time you may simply want to pay down your mortgage to make your LTV 80% or lower again.
Here's a great example I modified from a WSJ article highlighting the trend of putting more cash in your home:
- Value of Home: $910,000 from $1,100,000 just a couple years ago.
- Current loan balance: $809,000 (on a 30-year fixed mortgage at 6%)
- Loan-to-value = $809,000 / $910,000 = 89% = too high!
- Current monthly payment: $6,398
- Cash paid at closing to retire current loan: $80,000
- New loan terms: $729,000, 15-year fixed mortgage at 4.375%
- Updated loan-to-value = $729,000 / $910,000 = 80% = compliant!
- Lower new monthly payment: $5,530
- Monthly payment savings: $868 per month ($6,398 – $5,530)
- Return on the $80,000 investment: $868 / $80,000 = 10.4% return annually for five years.*
*Includes both the principal paid down on the new, shorter-term loan and the monthly savings in loan payments.
I don't know about you, but I would throw ALL my money at an investment that guarantees 10.4% annually a year. Ten percent returns is what Bernie Madoff promised, and he built a $50 billion empire!
Hence, the key variable is whether you want to stay in your house for 10+ more years and whether you have the cash on hand ready to pay down your mortgage and refinance in America.
Key Takeaways
The fact that more people are injecting more cash into their homes tells me that people have become conservative with their finances. In addition, they and are looking for as close to sure things as possible.
If you are tying up tens of thousands or more dollars in an illiquid asset, you're also showing that you are more confident about your financial future.
It's unfortunate that not everybody who owns a home can take advantage of current low rates without having to inject more cash.
But, if you are adamant on taking advantage of the current low rate environment in the US, and plan to stay in your house indefinitely, then it behooves you to pay down that mortgage and increase your disposable income.
Your budget will thank you in the long run, and America will thank you further!
Note: Hopefully many are able to take advantage of these rates because you've followed the 30/30/3 rule of home buying. With a 20% buffer, and an extra 10% in cash savings, you should be alright.
Wealth Building Recommendations
If you're looking to buy property as an investment or reinvest your house sale proceeds, take a look at Fundrise. They are one of the largest real estate crowdfunding platforms today.
Fundrise allows everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals.
They are the pioneers of eREIT funds and are creating an Opportunity Fund to take advantage of tax-efficient Opportunity Zones.
Thanks to technology, it's now much easier to take advantage of lower valuation, higher net rental yield properties across America. Personally, I've invested $810,000 in real estate crowdfunding to diversify and earn income 100% passively. I believe the real estate market will stay strong for years to come.
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I recently closed on a refinance in July. It took several months to complete but wasn’t too bad overall. A refinance I did a couple years ago was much longer and more tedious. It feels so good to be saving more money each month. I’m using the extra savings to pay down more principal so it feels like a double win. Rates are just crazy low now. I’d feel silly if I didn’t refinance!
I almost refinanced my house from a 30 year to a 15 year mortgage under the HARP program a couple of weeks ago, but decided not to go through with it even after I had paid the $450 non-refundable application fee. After doing some calculations, I found out that if I kept by existing 4.875% mortgage (27.5 years remaining), and paid the same amount like the new 4.25% mortgage for 15 years, I’d be done with my mortgage in 15 years 11 months. If I included an additional $99 on top of that, I’d be done in exactly 15 years. For less than a $100 difference I decided to not go the route of a new mortgage. I highly recommend that people use a mortgage calculator to determine if paying for a new mortgage is worth the cost. Had I the opportunity to get one of the sub-4% mortgage rates, there is now doubt I would have pulled the trigger. Unfortunately, my house is underwater, and I can’t (or want to) do a cash-in refinance to bring the balance owed to under 80%; so, HARP was my only option.
Sam, what if house prices decline another 10% and I lose the additional $80,000 equity I contributed to my house? Here’s another way. Write the check for $80,000, sell the house and eliminate the debt entirely. In a deflationary environment, which housing has been in for a while now, debt costs more as time passes. Housing is consumption of shelter, not an investment. What if we bought the amount of shelter we needed, not wanted, AND could afford with our cash flow? Would America be in a better position financially?
Mike,
We’ll never know for sure what will happen to asset prices. However, if you know you’ll stay in your house for a long time i.e. 5-10+ years, then it is simply a mathematical certainty in this example you will earn 10%+/year on your $80,000. There aren’t any variables unless you decide not to stay for the long term.
I’ve never thought about a house as an investment, just a home. In your example, yes, would be great for personal balance sheets if everybody could be reasonable with their finances.
We had a hard time finding a lender for our small mortgage when we sold our last home and bought our condo. So we have a 15 year (several years into it) with a low balance financed by the local credit union.
If we refied with them, it would be a lot of paperwork to not save much money. However, I agree with you for most mortgage holders.
We would refinance but we have a 2nd mortgage which makes us ineligible. Once that is paid off we could refinance, but by then rates will probably be back up to higher levels again. Only time will tell!
Gotcha. It’s called a subordinated loan. Actually, if you have a low enough LTV ratio, you can still refinance.
Sam,
Great article. Can you share the calculations behind the 10.4% return. I’d like to better understand how that return was calculated. I am going through the process now, and trying to weigh how much I should contribute at closing (beyond getting to an 80% LTV). Thanks.
Sure TB. It’s basically the amount of CASH you spent to pay down your mortgage DIVIDED BY the interest savings differential between your new mortgage and your old mortgage.
Example below
# Current monthly payment: $6,398
# Cash paid at closing to retire current loan: $80,000
# New loan terms: $729,000, 15-year fixed mortgage at 4.375%
# New loan-to-value = $729,000 / $910,000 = 80% = compliant!
# New monthly payment: $5,530
# Monthly payment savings: $868 per month ($6,398 – $5,530)
# Return on the $80,000 investment: $868 / $80,000 = 10.4% return annually for five years.*
Great article Sam.
After I got out of school my mom was really pushing for me to buy a house – I had not started working yet, but I’m glad I didnt – My job fell through before I could start. So now I’ve been making plans and saving money for a home to buy in the future. Luckily for us (or unluckily) real estate values never rocketed up around here, and haven’t really fallen much either. However, I do notice that the rates are very, very low. Even though I’m not in a position to buy a house quite yet, the rates are enticing!
The rates are enticing, but don’t buy just b/c of rates. Home ownership is wonderful if you can afford it, hence follow a 30/30/3 rule or something similar. You don’t want to be stressed while living in your home!
Ahem: “put off the inevitable”
Sam,
What are the upfront costs (points) associated with refinancing a mortgage? Shouldn’t these be added in your calculation?
I don’t deal with mortgages since the first condo I bought I paid 100% cash and plan to do the same for any subsequent home purchase. Of course, high interest will be my friend when it is time to buy with cash. I’m ready for a long wait given our trend of trying to put of the inevitable.
-Mike
Mike Hunt and Sam,
Hope neither of you minds that I have replied.
You can and in my opinion, can get, a loan with no points. When you do this the interest rate will be higher. For example a 30 year loan with 2 points may be 4.5%, with 1 point, 4.625% and with no points 4.75%.
You also can get loans with no fees – which is what I just got on Monday. Based upon reading this post and other knowledge, I guess no fee loans are not all that common. What I do not know is why? I closed on Monday and went from a 5.25 % 15 year loan to a 4.0% 10 year loan. I paid no fees (no they were not rolled into the loan). I actually walked away from the refi with a $900 check (which I will pay back over 10 years).
In the first sentence the second “can” should be “should”
very insightful! it feels so good to save money with lower rates
Jeremy, that makes me VERY happy! That’s such a huge cost down for you. Hope your break even on the fees is not too long.
I wonder, does almost everyone pay fees? And if yes, why?
I just refinanced from a 5.25% 15 year mortgage to a 4.0% 10 year mortgage thru a mortgage broker. I paid absolutely zero dollars in fees. I paid $395 for the appraisal BUT I got the $395 back at closing. The loan had about $1,500 in fees but I did not pay for any of them. I realize these fees factored into my 4.0% interest rate. However, since I paid nothing in fees, if in 6 months the rate is 3.875 and I feel like going thru the process again I can and again I will pay absolutely nothing.
Hi David, no fees are simply baked into your rate. If you had paid a fee your 10 yr mortgage would be 3.75% or 3.875%. There’s no free lunch. Everybody pays fees, just whether it’s baked in so it seems like no fees or not.
I’m sitting tight and waiting on my cash as well, but I have qualified to refinance a couple properties, so that’s what I’m doing.
Sitting tight is wise, given the illiquidity of one’s house i agree. All depends on your own confidence.
Exactly – I did a cash-in refi last year because while I had put down 20% when I bought my home in 2005, it did decline in value, so I brought an extra 20K to closing but I had gone from like 6% down to 4.625% on the refi. I had calculated the NPV (even with cash in) was like $20K over 10 years. Not too shabby! Beats the heck out of paying PMI to subsidize defaulters!
BoA has another surprise… 5-yr interest-only ARMs at 3.5% with 1.125 points.
Think you need to look at the jumbo rates (15-yr fixed mortgage is 4.875% with 0.75 points on bank of america’s site) rather than the standard mortgage rates when you’re talking about loans over $475k.
Other than that minor detail the math is correct.
Yep, jumbos. Citi is pretty good… i.e. 3.625% zero points, zero costs on super jumbos.
Well I’ve been thinking a lot about buying a home recently, that’s not exactly refi, but at least I will be able to take advantage of the low rates. You really opened my eyes with the 30/30/3 rule. Since your’s and others’ comments on my blog considering my decision to save for a house, I’ve started to think of some other options. Like, a VA loan.
The 30/30/3 rule will save you A LOT of pain if things don’t turn out the way you want. Take your time, as there’s no hurry to own, unless you find that perfect place.
Mortgage terms in Canada are generally 5 year fixed, so although there can be an advantage to refinancing, you cannot fix a low rate for 15 to 30 years! There is also the choice of going with a variable rate, which is even lower at around 2.10% or so.
If the S does HTF, you guys will be counting your blessings while we will be dealing with punishing rates! Oh, and our loans are all recourse.
Yikes, didn’t realize everything is only fixed for 5 years, and all loans are recourse!
I don’t think the SHTF at all, and rates stay low for a loooong loooong time. Borrowing on 5 year terms is just fine if you ask me.
I thought that when you refinance, you “start the clock” all over again. Is that right? In your scenario, does it take into account that a person has already been paying x amount of years on their home but now has a new 30-year loan? I just read a book (as a review) on renting vs. buying a home, and this was one of the things that jumped out at me; every time you refinance, you start your mortgage clock over. Any thoughts?
1) You can get any length of mortgage from the company, the longer the length the higher the mortgage rate – generally.
2) No matter what the official length of the mortgage is, you can pay any amount every month as long as it is at least the amount based upon the length of the mortgage with the company. If you get a 30 year loan – but had your old loan for 5 years and want to pay the new 30 year loan off over 25 years – you just figure out what monthly amount will pay the loan off over 25 years and pay that amount every month.
3) Many people either think what you think or at least that is what they do everytime they refinance.
I just refinanced on Monday. My original loan was for 15 years at 5.25%. I had that loan for 2 years but had made an extra $75,000 in payments on that loan. Thus, I was able to get a new 10 year loan at 4% and my montly payments are dropping from about $2,500 a month to $2,000 a month.
Well said David. Thnx for following up and answering for me.
Sam, I recently ran into this exact issue with my refi since I’ve owned my home 2 years and it’s depreciated slightly. I’m paying down the difference in order to get to 80% and agree with your logic 100%.
Now my only issue is that I’m a week away from closing and it looks like rates have dropped about a 1/4 point since I locked. Trying to figure out whether it’s worth shopping around again to lock at a lower rate with another provider and go through the whole process again.
Yeah, I’m kinda in your same boat too. Worth just asking the lender the cost of breaking the existing contract, and compare it to the monthy interest savings yeah? Let me know how it goes!
So I asked the lender about the cost of breaking the existing contract and he told me that it could not be done at all (at any cost) because I was locked. I suppose my alternative is to find another lender and start the process over again, but man, I can’t believe how much time it took to pull together all the necessary documents. Every other day for the past month the underwriter asks me for something new. Why couldn’t they ask for everything all at once? Great question! Anyway, they appear to be really clamping down on loans…quite the other extreme from a few years ago!
At any rate, at most I’m about 1/4 point higher than the best rates right now, so I’m not sure it’s worth fussing about. Plus, my current lender is a friend of a friend and I don’t want to screw him over. It’s worth paying a few extra bucks to avoid burning a bridge.
They are clamping down like a MOFO you’re right. I’m in the final stages of my refi, and when it’s all said and done, it will have taken 60 days! That’s 20 days longer than in the good old days.
Your lender is lying that you can’t get out btw. You can do whatever the heck you want. You’ll just have to get an ear-full from them.
Whatever it is, you are saving money with your new rate anyway, so it’s all good.
Sam, I thought instead of working to pay down your mortgage, you are just supposed to walk away from it… :)
Anyway, I know several people that did want to refinance and were turned down, for the exact reason you mentioned. However, I don’t think they have any burning desire to pay it down further. I think they just said ‘oh well’ and moved on. That is the thing, people don’t seem to want to take that ‘next step’, and they just give up instead.
I refinanced years ago. When I did refi, I also cut my mortgage from 30 to 15 years (4.75 percent) with barely a change in payment. That is what I scream about, is to think about all options when refinancing because I can’t tell you how happy we are that we cut our mortgage term in half while giving up very little every month.
Walking away is unpatriotic! lol. However, it definitely sounds strategically sound in cases where there seems no hope, and the banks aren’t willing to work with you.
Banks should work with all borrowers in these times if they ask, b/c it’s better to do a rate mod than have a borrower default.
Congrats on your lower term mortgage. 15 years is great.
This is all nice and rosy but the real facts here are 1) Housing values have fallen a lot more than that since their peak in some markets where if you ‘only’ lost the 18% or so you illustrate here, you’d probably be pretty lucky and, 2) Many families don’t have that amount of cash to make up the loan-to-value ratio. Job losses, salary freezes (or reductions), increased out of pocket health care costs or other factors make the assumption of having 10% lying around a tough one for many families. Going back to the first point, that 10% might not even be enough for most people interested in re-financing.
True, although hopefully not every home owner in America bought at the peak. If 1 out of 5 are under water, then 4 out of 5 are not. So, t the very least, the 4 out of 5 should think about refinancing if they have a mortgage, period, since any rate they do have is higher than rates now most likely.
For the remaining 1 out of 5 who are under water, I’m sure a decent percentage of that 20% is not more than 18% underwater and has savings, in which case they should pay down their mortgage to refin into a better one.
BTW, I’m having trouble commenting on Blogger with Firefox, and tried to leave a cmment on ur site but i don’t think it went through. Have u ever experienced such issues?
I think the problem with commenting is only for Firefox users on Mac on blogger sites with embedded commenting that requires a captcha entry. I’ve changed it to a different scheme which might hopefully work.
I think you’re optimistic on how much cash people have, whether they’re underwater or not. I agree that in a perfect world everybody would have enough cash to get back into the realm of having 20% equity, but I don’t think most people are there. You also have to consider that many areas got really hard hit, so in areas like Florida, Arizona, and Nevada where prices went down 50-60% in a lot of areas, there’s no way that someone can bring the cash to the table that you’re talking about, and you have to consider that a lot of people bought property and took out mortgages that are now either going to walk away from their mortgage or be stuck with the mortgage rate that they have.
Hmmm, that’s a bummer on the commenting problem. I guess I can have two browsers open then.
Yes, Florida, Arizona, Nevada and many parts of California have it rough. There seems like no way out, which is why I’ll be posting something else on non recourse states. Could very well be a good idea to walk away!