Time to Refi?


Last week, the Treasury Department signaled that they were in the process of buying up to $100 million in Fannie/Freddie securities, thus injecting a massive amount of liquidity into the mortgage market.  As a result, the 30-year rate took a massive dive…from 6.375% to 5.25%, a rate that hasn’t been seen for at least 2 years.  The market moves daily and today the 30-Year rate is hovering around 5.5%.

These rates open up opportunities for refinancing, which may help some of us lower our monthly costs.  The question is: when is it right to refinance?  Simply put, if you can pay back the costs of refinancing in 30 months or less, it is a good investment.  Here’s the calculation:  multiply your outstanding balance by your existing rate; then multiply the same balance by the new rate (I’d shoot for 5.375%); subtract the new interest amount from the old amount and divide by 12.  This is your monthly savings.  Then divide this into the cost of refinancing; I’d use $3300.  If your answer is less than 30, go for it.

Here’s an example for a $325,000 mortgage.    $325,000* 6.25% = $20,312; $325,000*5.375% =$17,468   (20,312-17,468) divided by 12 = $237/month savings.  The cost of $3300 divided by 270 is 12.  You will pay back the cost of the refinancing in 11 months.  If your calculation is close to this, call me!

I have found that in most current refinancings, where credit scores are above 720 and the loan to value is below 70%, underwriting is not asking me for any income or asset documentation.  By the way, the only rate that seems to have dropped so precipitously is for a 30-Year Amortizing loan; everything else seems to be more expensive and out of balance with normal rate relationships.