In the last few weeks, I have seen a lot of our previous borrowers come back to us applying to refinance. At that time most of us thought the rates would never be that low again. I remember a few lucky borrowers who were able to lock in at under 5% for a 30 years fixed rate without having to pay points. We can get that rate on a good day - even for loans bigger that $417,000.00.
But one major difference today is the amount of rebate points lenders are offering. Borrow123.com customers know that rebate points can be used to offset closing costs. In the past you might get ½ point rebate for taking a 1/8 point higher interest rate – now lenders are offering less. For this reason I feel it is probably more advantageous today to pay the closing cost and lock in the lower rate.
The reason I feel this way is because the majority of borrowers are solely looking to lower their monthly payment. Obviously, the way to do that is to lower the interest rate as much as possible. And as long as the borrower is willing to stay in the home for a few years, the lower monthly payment will save the borrower more money.
As an example, we will refinance $400,000 at 5.375% versus $405,000 at 4.875% (it is $405,000 because we will roll the closing costs into the loan, so the borrower still does not have to pay out of pocket).
The $400k loan will have a payment of $2240/month and the $40500 loan will have a payment of $2143/month. After 5 years, you will have a higher balance on the $405k loan by a couple of thousand. This may seem surprising – until you factor that the borrower paid $100 less each month for 5 years and has saved $6000.
With the way the stock market is going, you are probably better off investing your money locking in a low long term rate for you mortgage than other investment alternatives.
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