Question by Amit Gupta: Refinancing and Mortgage Rates?
Are refinancing and mortgage rates different? Also, is refinancing closing cost higher than mortgage closing when buying new home. I bought a home 10yrs-Fixed-ARM in June’07 at 6.25 and now the rates are 5.75. I will save $ 200 per-month if I get 5.75. Should I refinance? Advise please. I have good credit.
Answer by DJE
Mortgage products are priced (assigned an interest rate) by the product type tied usually to federal reserve rates (the index) plus however much more the lender wants to charge you (the margin). The index changes daily usually until your rate is locked. Your existing rate is probably tied to the 10 year treasury bill (T-Bill) index, and then further priced by how long the amortization (how long to pay it off) is (10, 15, 20 30 etc years). The longer the payout, usually the higher the rate. The cheapest rates are fixed for the shortest amount of time and then variable, while having short amortization. The “margin” added to the index is based on your credit score and how much of the property’s value is being mortgaged – that is, the riskier the loan, the higher the interest rate. So if you have not great credit and you seek to finance 90% or more of the value of the house, you are going to have a high margin added to the index applicable to your loan type. Conversely, with good credit and borrowing 80% or less of the house value, the margin and thus interest rate will be lower.
So, refinancing an existing mortgage theoretically would have similar pricing, except that circumstances have changed – if the property appreciated as you paid down the mortgage,and your credit is good, your loan will be priced based on there being more equity in the house and thus a more secure loan. The closing costs will be lower since a purchase involves many more fees. Some lenders have “no fee” refinancing, but usually have a condition that the fees will be paid by you if you pay off and discharge the mortgage in less than a certain amount of time, like 3 years for example. This would happen if you sell the house in that time or refiance with another lender. And the no-fee aspect is all part of pricing the loan – you could probably get a little better of a rate if it is not a no-fee loan – although it is a good way to go if you need all the money from the refinance.
Talk to your existing lender about refinancing – they want to keep you and are in the best position to give you a good deal, since it is much easier to simply adjust your rate and term, than to start over with a new lender who has to run an appraisal and pay mortgage recording fees and taxes – which will be priced into the loan.
Then go to other lenders who advertise the rates you like – and let them prove to you why you should refinance in dollars and cents. But beware of adjustable rates that adjust within less than 5 or 7 years. Of course, 30 year fixed would be great, but the rates are higher, and in reality, the average life of a mortgage is about 7 years based on sales and refinancing.
Based on your own analysis, $ 200 is a big monthly savings, although half a point (.5%) is not that much – it is significant with a $ 500k mortgage. Sounds like a refi may work for you, but let the lenders show this to you – that is what they do. Good luck.
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