So right now mortgage rates are super low. It’s a great time for many people to refinance. You can likely get a 30 year fixed rate mortgage for close to 5%. It is a currently at an all time low for most people. So why not refinance?
First, I know people who put nothing down, thus are finding it impossible to refinance their mortgage because banks refuse to give out loans for 100%+ of the value. Personally I understand why banks are doing it, but I think perhaps they should. These people are looking to stay in their homes and getting a lower rate will make it more likely they can pay off some equity and stay put. Do we really want them walking away?
Second, bad credit ratings. I also know people who have since they bought their home trashed their credit. Thus the obvious reason for not refinancing is that they don’t qualify. They may have a ton of equity, but they are unable to get a better rate than they currently have because their FICO score has tanked.
Personally I fall into both groups three and four. Group three are people who aren’t sure they will recoup the refinancing costs. Why? Because it depends on how long you plan on staying in the house. As I will mention next week, I have no idea if we are staying through this year, next year, or longer. Thus it’s hard to commit $3-5k to refinance when I’m not sure we’d recoup the closing costs depending on when and if we sell our house. I think unless you are absolutely certain that you will be able to stay put long enough to recoup the refinancing costs, you should be careful to do it. Too many people keep refinacing, when it would have been better to stick with their orginal mortgage.
There is another group of people who have super low Adjustable Rate mortgages. This is the group we also fall into. Our mortgage is 4.25% and right now rates haven’t falled on a 30 year quite that low. So we’d be paying more than we are now, making it difficult to recoup the closing costs.
Yes I know that our rate will adjust, however we have until 9/2012 to refinance our home. At that time 30 year fixed could be 6 or 7%, and our ARM might be higher. But it’s a risk we’ll have to take. Another consideration for us, is that we have a Jumbo mortgage. Meaning our mortgage is larger than $417k or a traditional conforming mortgage. Thus our rates are naturally about 0.5% higher than a conforming mortgage. I’ve talked to our bank and the lowest rates for Jumbo mortgages are 5.25%. If we had to refinance in 3 years, we will be under the $417k mark and we can refinance into a conforming mortgage. We are sitting at $430k right now and we don’t have $15k sitting around to toss at the mortgage and refinance to a conforming rate.
Thus for us we’ll keep our mortgage and then consider refinancing when we can get to lower rate. Our neighbors who only put down 5%, had a first for $417k, second for the 15% can’t refinance either because banks are no longer doing 80-15-5. So the idea of us refinancing $15k and $417k is not going to happen.
I guess these are a few reasons why some people are not refinancing right now.
8 responses so far ↓
1 Fit Wallet // Jan 28, 2009 at 9:28 am
I’d love to refinance right now to roll our 10% second mortgage with an 8% interest rate into our lower-interest mortgage (we had an 80/10/10 loan). But I got a shady deal. I never should have gotten a loan this large without my partner’s income included, but her credit was really bad at the time. The loan officer looked the other way and approved it based only on my income. Now if we try to refinance, her credit (though better) will still be an issue, and there is no way any bank is going to refi with just my income. Oh well. At least we’ve got a normal, fixed-rate mortgage that we can afford!
2 Miss M @ M is for Money // Jan 28, 2009 at 9:31 am
At one time I had 20% equity, now I’m negative 20% or more! I did put some money down but not much, even had I put 20% I would be unable to refi under traditional standards (having 20% equity). Some lenders will refi at lower equity levels, I may need to look into that. I have an ARM too, but I reset in 2 years and have a higher current rate than you. I’d love to refi…
3 tom // Jan 28, 2009 at 10:44 am
We just refinanced our 30 year 5.75% with a 7/1 ARM 4.25%. It’s a bit of a risky move, but we don’t plan on being in our current house for more than 5 years. Plus my company, if i accept a job in another location, will pay relocation, which includes buying our house. So, for us, it’s worth the risk. Of course there is the fact that I assume I’ll be making much more in salary in 7 years.
4 LivingAlmostLarge // Jan 28, 2009 at 2:22 pm
Ouch, that the above people can’t refinance. Tom like you, we are unlikely to stay long term in our house. At least not longer than our 7 years. Also we bought on one income, so in a worse case scenario, if we stayed put I’d likely have a real job versus a student salary.
That would double our income immediately and put us in a very different situation financially. So it definitely is worth the risk.
Just like you if we relocate our home will be bought by the company for the price we paid, no closing cost, and no worries. It’s not something I like to mention, but it did factor into our decision to purchase.
5 Tim Epps // Jan 29, 2009 at 2:18 pm
Fit – Don’t discount your ability to refinance with your partner’s lower (but better than before) scores. Unless there are issues in the last 12 months, you can look at an FHA loan that will go to 95% of your home’s current value. Even with the FHA’s required PMI, you should be able to achieve significant savings. As LAL points out though, make sure that your monthly savings would recapture your costs of refinancing. I only lend in Oklahoma, but would be happy to help you with criteria to select an objective, professional lender that give you the right advice (and get you the right loan, if warranted).
LAL – Your analysis is sound as your situation as outlined does not warrant refinancing. Some people get hung up on getting the sexiest rate so they can brag to their friends. Meanwhile the only pockets they have succeeded in lining were those of the originator that doesn’t mind not sleeping well.
6 LAL // Jan 29, 2009 at 5:36 pm
Thanks a lot. I mostly am concerned about recouping the closing costs unless it’s free.
7 Tim Epps // Jan 29, 2009 at 5:49 pm
Every transaction has costs – Either covered by building in to a higher rate or rolling in to your new loan amount. Those that bill a “no cost” refinance or loan are disingenous at best.
In the words of Jackson Browne (as homage to Friedman & Thurow), “Nobody rides for free.”
8 LAL // Jan 29, 2009 at 5:55 pm
Yep, but if the rate is low enough it’d be worth it! I will write a bit about using a HELOC a few years ago as our primary mortgage.
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