Question. BREXIT is a major financial problem, but I recently heard that mortgage interest loan are almost back to an all-time low. And it does not appear that the Federal Reserve Board will increase the discount rate dramatically before the end of this year. I am interested in refinancing my current 5-1/2% mortgage, and want your advice on how to go about doing this. What costs will be involved, and how do I determine whether refinancing makes sense?
Answer. I have two crystal ball on my desk and still cannot predict the future. But current mortgage interest rates are very low, so you should immediately investigate the possibility of refinancing.
You should understand that when you refinance, in effect you are going to a brand new settlement. The only difference is that there is no buyer or seller present at closing, and there will be no real estate broker involved.
There are new rules regarding mortgage disclosures, issued by the Consumer Financial Protection Bureau (CFPB) and I highly recommend you start your research on their web-site. There is a very helpful publication entitled "Shopping for your home loan: Settlement Cost Booklet which you can download free of charge.
Shop carefully for interest rates. Determine what the various rates will be for a fixed 30-year mortgage, and compare those rates to a fixed 15-year mortgage as well as to an adjustable mortgage tranaction.
Now that rates are low, you may want to seriously consider obtaining a fixed rate mortgage.
When you go to the lender, determine exactly what closing costs will be required. What people often do not understand is that the lender -- whether it is your current lender or a new lender -- will want a brand new title search, will probably want a new title survey (unless it is a condominium) and you will have to pay for a new lender's title insurance policy.
The lender is now obligated to promptly give you what is known as "Good Faith Estimate" (GFE) which will project what you may have to pay in order to get the loan. You are only allowed to pay the lender for a credit report until you get the GFE.
Make a chart of all of the expenses. Go online to obtain a mortgage amortization schedule so you can determine exactly what your new monthly payments will be. Compare the new monthly payment with your existing; don't include the montly escrows for real estate tax and insurance, since you will still have to pay those fees regardless of what loan you have.
If you currently have an adjustable rate mortgage, you will probably be thinking that the rates will be going down this year, or at least not increase, and thus why should you bother refinancing?
This is a major dilemma. You are probably correct. But, if the economy gets better sometime next year (as we all expect it will do) then rates may very well start going up again, in which case your adjustable will follow on the upward path.
In my opinion, there is considerable merit in locking in a fixed 30-year rate at a lower interest rate, even though next year your adustable rate may stay the same or even go down slightly.
Should you consider obtaining a new adjustable mortgage at rates that can be as low as 3% for the initial term?
Again, much depends on your own personal circumstances. If, for example, you only plan to keep the current house for a short period of time, then clearly an adjustable rate at 3% makes sense. However, if your intention is long-term, in a few short years, your rate could be very high. This should not be acceptable to you, especially when you can lock in now for a lower rate for a long period of time.
You should sit down with all of the facts, and spend an evening with your calculator, computer and your amortization schedule. Basically, do the numbers.
We used to have a rule of thumb that one should refinance when rates drop at least 2% from your current mortgage. With the tremendous volatility of the financial marketplace, this 2% rule of thumb does not always makes sense. Since rates are clearly low now, and that may not last forever, everyone should considering refinancing immediately.