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Is now a good time to refinance? Reduce your mortgage payment with 2019‘s low rates

Dan Green
The Mortgage Reports contributor

Two things you need to know about refinancing now

When mortgage rates drop, homeowners typically wonder: Should I refinance my mortgage?

The short answer is probably “yes” — especially if you keep these two things in mind when deciding whether to refinance:

  • Getting approved for a mortgage is simpler and faster than it used to be, so it’s likely the refinance process will feel smooth and easy compared to your original mortgage application
  • In general, you should refinance if it will save you money — and with current interest rates at historic lows, there’s a good chance it will
Verify your eligibility fora historic low rate. Start here (Oct 13th, 2019)

Why 2019 is a good time to consider a refinance

Current mortgage rates are holding low, and they’re expected to stay that way through the rest of 2019.

Even if you missed August and September’s near-record lows, it’s likely not too late to secure a world-class mortgage rate.

Consider this: According to Freddie Mac’s records, interest rates for a 30-year fixed mortgage averaged 4.7% for the week of September 27, 2018.

For the week of September 27, 2019, they averaged about 3.6% — a full percentage point lower.

Dropping your rate by just 1% now could put more than $12,000 back in your pocket over the next 10 years.

Dropping your rate by just 1.0% puts about ten percent of your mortgage payment back into your pocket each month.

That means for every $1,000 you pay to your lender today, you could reduce your payment by $100.

That’s $12,000 saved over the next 10 years — simply by doing a refinance.

More than 11 million homeowners stand to save by refinancing — even some who are underwater

Thanks to today’s low rates, more than 11 million homeowners stand to shave at least 0.75% off their mortgage rate by refinancing, according to a recent report by mortgage analytics firm Black Knight.

Many homeowners have already leaped at the opportunity.

In fact, a survey of The Mortgage Reports readers showed that the number of people looking into a refinance was up by 458 percent between August 2018 and August 2019.

Homeowners who are “underwater” — meaning they owe more on their home than it’s currently worth — have options to take advantage of 2019’s low rates, too.

Fannie Mae’s high loan-to-value refinance might be a good option for homeowners looking for a lower rate, but who owe too much on their home to meet traditional lending requirements.

Fannie Mae’s program replaces government-sponsored programs like HARP, which expired in 2018, and FMERR, which is set to expire at the end of September 2019.

If homeowners can drop their rate, there are few reasons not to refinance in this environment.

Verify your refinance eligibility (Oct 13th, 2019)

Is a refinance worth it for you in 2019?

Low mortgage rates are enticing, but homeowners balance the want for a lower rate with the question of “Is this even worth it?”

They worry about things other than low mortgage rates; maybe how they felt the last time they applied for a mortgage, or things they’ve heard from friends or family about the process.

It’s understandable to avoid refinancing because of the stress it may add to your life, but what if that stress is misplaced? The mortgages of 2008-2012 are very different from the mortgages of today.

Getting approved for a mortgage is simpler and faster than it used to be.

And then there’s the question of “Does it make financial sense to refinance?” On this point, it’s best to avoid “common knowledge” because the common arguments consumers make against refinancing can be quietly misleading.

Perhaps you’ve heard these two arguments.

The first argument against refinancing goes that it doesn’t make sense to refinance unless you’re lowering your mortgage rate by one percentage point or more.

The second says that it doesn’t make sense to refinance if you’re going to move before your loans hit its “breakeven” point.

Let’s debunk this “conventional wisdom.”

The fallacy of “saving one percent” on your mortgage: Even a 0.5% or 0.25% drop can be worth it

The “saving one percent” argument is a holdover from the 1950s when closing costs were big, loan sizes were small, and homeowners lived in homes until their death.

Back then, when loan sizes were typically less than $60,000, a homeowner had to lower their mortgage rate at least one percent to save $1,000 annually.

At today’s loan sizes, the typical refinancing homeowner can save six times that amount.

Even a modest mortgage rate reduction can result in substantial monthly savings. So long as costs are held low, even a quarter-percentage point reduction can be worthwhile.

You don’t need to save 1 percent for a refinance to make sense. You only have to save money.

The logic leap in the “recoup your closing costs” strategy

Another reason homeowners pass on a refinance is that they think they’ll never “recoup their costs.”

They rely on a vaguely-mathematical approach known as the “break-even method” which, it turns out, is as flawed as the 1% fallacy.

The main issue in using the break-even method to evaluate a refinance is that the break-even formula makes three huge assumptions.

  1. That you’ll never want to refinance your home again
  2. That you’ll never need to refinance your home again
  3. That you’ll never sell your home or move

These assumptions carry heft.

Of course, you may want to refinance your home sometime in the future. There are a lot of reasons why you might.

Maybe mortgage rates have dropped again. Or, maybe you’d like to take cash-out for a home improvement project or to diversify your assets.

Additionally, 15-year mortgage rates are extremely low. Maybe you’ll want to reduce your long-term interest payments because 15-year mortgages pay 65% less mortgage interest over time.

Now, before you say “mortgage rates will never go lower,” remember that people have been saying that since 2009 and, every year, they’ve been wrong.

The fact is, no one can accurately predict mortgage rates in the future.

Mortgage rates can go lower. Wall Street is unpredictable. And, furthermore, your financial situation could change. That, too, is unpredictable.

It’s for these reasons that the break-even method fails to work — you can’t possibly know for how long you’ll hold your refinanced loan, which means that you can’t really determine your break-even point.

So how can you tell whether it’s a good idea to refinance?

Verify your refinance eligibility (Oct 13th, 2019)

A “safe” refinance option: The zero-closing cost refinance

There’s a better way to know whether it’s time to refinance — better than the one percent method and better than the break-even method.

Can you save money and pay nothing out-of-pocket to do it? Yes, you can.

Use a zero-closing cost mortgage.

Zero-closing cost mortgages are precisely what their name implies — they’re mortgages for which there are, literally, no closing costs. When there are no closing costs, there are no break-even points to consider, and no one-point savings to monitor.

When you can lower your mortgage rate and pay nothing to do it, that’s when you refinance.

The good news is that no-closing-cost mortgages are readily available across all loan types including FHA loansVA loans and conforming mortgages.

In general, for loan sizes of $250,000 or more, you can get a zero-closing cost mortgage by increasing your mortgage note rate 25 basis points (0.25%). For loan sizes over $400,000, the typical increase is 12.5 basis points (0.125%).

The extra bump in your mortgage rate creates more value for the lender. The lender then uses this extra value to pay your loan’s closing costs on your behalf. It’s a win-win situation, and you’ve paid nothing to get your refinance completed.

Zero-closing cost mortgages are available in all 50 states.

What are today’s mortgage rates?

Today’s mortgage rates are at historic lows — and they’re expected to stay there for the foreseeable future.

There are refinance opportunities everywhere. Ignore “saving one percent” and your “break-even” — look at your potential savings instead.

Compare rates from major lenders today to see how much you could save over the life of your home loan.

Verify your refinance eligibility (Oct 13th, 2019)