Interest rates are at an all time low. According to Freddie Mac, the average interest rate on a 30-year fixed-rate mortgage fell to a record low of 2.87% in September. A 15-year fixed-rate mortgage is averaging 2.37%. This is the lowest interest rate in 50 years.
With these rates I have been thinking about refinancing the loan of my main house. I currently have a 4.5% 30-year fixed interest rate. This rate is not bad, well it was not bad when I got it. My credit score is in the top 5% percentile. I have no other personal debt other than the mortgage debt of my house and the rental home.
Take a look at the interest rates in the last year:
With these rates I can lower my monthly payments, save on interest rates on the life of the loan and get a 15-year loan. It is a no-brainer. But what is keeping me thinking twice about making this financial move is a few things.
The Real Cost of Refinancing
Refinancing a mortgage loan is quite similar to buying a home. Just about the only difference is the taxes that you do not have to pay. This is my main reason why I am debating whether to refinance or not. There are so many components and many fees and “administrative costs” that for the average Joe can be a nightmare. It can also be a way to give your money to the bank and loan officers. Refinancing a mortgage loan can cost anywhere from 3% to 6%.
Let’s take a look at the fees.
Application Fees
This fee can be up to $300. This is the fee the bank or the lender can charge you to start the process. This is to check your credit score and process the loan. Even if your loan is denied this fee will have to paid to the bank.
Loan Origination Fee
This is the fee that is charged by the broker to evaluate the loan. To see if you are worth what you say you are worth. Basically what they are doing is determining if you can payback the loan and will not default in months. This fee can be up to 1.5% of the loan.
Points
These are fees you pay to lower your interest rate even lower. For example, if you reduce the loan has a rate of 3.5% but if you buy a point you will reduce the rate to 3%. This can be good if you intend to live in the house for a long time. But here is the tricky part about these points. Often brokers will add points to make more money on the loan. More money for them. It has no impact on your loan interest. This is where people get screwed. Be careful. These points can be up to 3% of the loan amount. Ouch!
Appraisal Fee
This pays so that the lender can send a person out to your house to see the inside and out and to determine if the house is really worth what you say it is worth. You can live in a nice neighborhood and the houses next door are selling like crazy but when the appraiser comes out to see your home, he sees that the roof is 30 years old, the four trees are dead and are a hazard and the furnace was replaced when U2 was on tour. You get the picture. The bank is so smart that they make you pay for this even thought they are the ones who will benefit. This fee can be up to $700.
Inspection Fee
This inspection is to analyze the structural condition of the property by an engineer. Banks do not want to lose money on the loan so they take every step to make sure they can turn around and sell your home if you cannot make the payments. They always win. Again, you are stuck with the paying for this fee which can be as high as $350.
Closing Fee
The lawyers have to pay for their years in school. They have to get a cut of the deal too. They check to see that all parties are who they say they are and witness the signatures. All these documents you sign are nothing more than templates that are used, again and again. The only thing they change is the details about the owner, buyer, property address, etc. Just for printing the documents and witnessing the transaction (aka closing the deal, the sale) they charge up to $1,000. You are paying for this too. Bank wins.
Title Search and Title Insurance
Again, the banks wants to make sure you own this property and more importantly to check that you do not have a lien or have refinanced with another bank. They will check the records on the property. The insurance is to help protect the lender if there are errors on the title. Again, you pay and bank wins. The cost for this around $800.
Survey Fee
The lender wants to make sure that they have the correct land size and boundaries. This survey helps to determine if the house is located legally where you say it is located. Again, you pay for this. The fee can be around $300.
Home Insurance
This is probably the only fee that you pay that protects you to some degree. You already pay this on your home anyway. Either way, the bank is protecting its investment. If the house is burned down or a tornado destroys it completely well they have to build this house again. The bank can build it and sell it and collect the remaining balance on the loan. The average premium for a home is around $800.
Prepayment Penalty
Just in case, check to make sure your current loan does not carry a prepayment fee. Basically it means that if you repay the loan before it matures, you will pay a penalty. This penalty can be up to 6 months of interest. Check to make sure.
All these fees can vary by state. I live in Maryland so these numbers are taking into account the fees here. Refinancing a home in Florida or California could have a different fee structure.
Now you can see why refinancing a house is not a easy decision.
Let us look at some numbers. Let us see how much we would save on a loan. I will use a $1,000,000 loan to make the numbers easy to understand. All the scenarios have the same property tax and home insurance cost.
This loan has the following:
- 30 year loan
- 4.5% interest rate
As you can see the interest rate on this bad boy is quite high. $824,067 total interest payment in 30 years. That is almost the same as the loan amount. Monthly payments is $6,833 with taxes.
How about a 30 year loan with a 3.25% rate?
Total interest paid in 30 years is $566,742. That is a difference of a bit over $250,000 in interest savings. The monthly payment is $6,118.
This is what I am going for. This scenario. A 15-year loan and I am hoping to get at a minimum a 3% interest rate. How does it compared to the 30-year loan. I certainly don’t want to give my hard earned money to the banks. They can pay me dividends from all those who have high interest rates and with 30 year loans.
This is more like it. In 15 years, the bank takes $243,046 in interest from me. Compared that to the 30 year loan with 4.5% interest rate and the 3.25% rate. Of course, the monthly payment is a bit higher at $8,672. But you know what, the savings in interest rate makes sense if you can afford it.
Savings in Interest Rates
You can see that the savings are something else.
Decisions, Decisions
What is holding me back from refinancing is also the fact that I want to use some of the cash I have right now to purchase a third home in 2021 when the housing market takes a dive. I would need to put a good amount of cash in order to refinance and get the loan to this low 15-year rate. That is where I am debating whether to make the jump or not. Plus let’s not forget the total cost of refinancing which can be anywhere from 4-6% of the loan. This will be no pocket change.
As you can see it is not an easy decision.
I will keep you folks informed what I decide to do. My business banker gave my contact information to the mortgage lender so I am waiting for her call. I may look into the existing bank that has my loan to see what they can do too. Any comments or suggestions are welcomed.
Thanks for reading and please share the website with your friends and family. If you want them to improve their financial habits that is.
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