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Interest Rate Roll Downs for Recent Purchases or Refinances

Homeowners who’ve purchased or refinanced within the past 6 to 12 months could potentially realize significant interest savings through a “No Cost” refinance. Because of the volatility of mortgage interest rates during this period, interest rates on high balance conforming 30-year fixed loans (up to $729,750 in the Bay Area) have ranged from as high as 5.5% at a point cost to as low as 4.375% at no points. True conforming mortgages (up to $417,000) have ranged during this period between roughly 5.25% and 4.0%. Current rates are at the low end of this spread and a refinance could shave off years of mortgage payments from your current amortization schedule, saving tens of thousands of dollars.

On the high balance conforming product, many borrowers who secured 4.875% -even at a point cost -thought they were securing the best 30-year fixed rate possible. Buyers limited by their close of escrow deadlines were forced to lock in at whatever prevailing rates dictated, but generally did well. It is only in hindsight and in comparison with today’s historic low rates that their otherwise bargain rates appear high. The attraction of refinancing into a lower rate, however, is diminished when considering the closing costs involved. Even at no points, the closing costs of a refinance now range between $3200 and $4000. This is where the value of a No Cost loan comes into play.

On a No Cost loan, the premium paid by the lender for a slightly increased rate absorbs the loan’s non-recurring closing costs, which include lender underwriting fees, processing, escrow, title insurance, appraisal, and other miscellaneous charges. The rate might increase by as little as .125% from, say, 4.375% to 4.5% to cover these costs. And a reduction of .25% to .375% can bring about dramatic savings, especially if it comes at not cost to the borrower. On a loan of $729,750 the amortizing payment comes to $3862. At 4.5% the payment drops to $3698, for a savings of $164 per month. More significant, if you were to apply the current 30-year payment against the 4.5% rate, your mortgage would be paid off in just 330 payments, or 27.5 years. This saves two and a half years of payments, or 30 monthly payments $3862 for a total savings of $115,860! Since there is no cost to realize this savings, it seems to warrant a few hours of assembling the necessary paperwork for the refinance.

One crucial component to consider is your property’s value. Refinances are mostly limited to 80% loan-to-value ratios (there are a few exceptions) and investor guidelines will restrict the refinance value to no more than the property’s original purchase price if close of escrow occurred within the past 12 months. Appraisals also tend to be tougher on refinance values and the appraisal process has also been greatly compromised over the past year. Appraisals are now ordered through a lender’s Appraisal Management Company (AMC) and this entity can siphon off the majority of the appraisal fee. Since appraisers are now routinely paid half of their standard fee, most are doing minimal work and providing substandard and overly conservative reports. If you feel you are near the threshold of having 20% equity it is essential to choose a lender whose AMC pays a fair wage so that you will at least receive a solid appraisal report.

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