Is Refinancing Worth the Costs?

If you read the papers, browse the web, or thumb through the blogs, you will hear that we have a little refinancing boom going on. Rates being advertised in the mid 4% range is enough to peak people’s interest. Those used to be the rates you found on shorter term loans like the 5/1 ARM’s. But getting a 30-year fixed rate at 4.50%? Incredible. For those that have been sitting on the sideline with their good 5.50% rate, the time is right to consider refinancing into a lower rate.

Forget about all the sophisticated fancy monetary talk about why rates are down, the main fact why refinances are attractive is simple supply and demand. Consider the following example:

A hot dog vendor finds himself with too many hot dogs to sell, he will most likely lower the cost of the hot dogs to sell off his inventory. Banks are in a similar position. They have access to cheap funds, and lots of it. In order to move those funds, they must lower their end price. Hence, we are seeing the lowest rates in decades for fixed rate mortgages.

Here is the funny thing. Beside the consumers benefiting from these low rates, banks are actually doing the best they have in months. One would think with the low interest rates, their profitability would be slim. But when you consider the spread between their cost of capital (which is close to zero) and fixed interest rates (around 4.83%), mortgage banks are seeing the highest profitable spreads they have ever seen. Consider just a few quarters ago when rates were around 6.00%, the cost of capital for many banks was around 4%. The spreads today are bigger. The banks win, the people win, everybody is a winner.

Another interesting thing is happening. The “no-cost” loan of the old days is being replaced with purchasing loans with 1,2, or more points. Lenders never really gave the consumer any real incentive to buy down the rate much more than 1 point. Now, you can buy down the rate as far as you can (no lower than 4.25%). Depending on your other risk factors like credit, loan to value, etc., the cost to get down that low may be just a couple of points.

Tip of the Day: The next time your mortgage broker quotes you a rate, ask them what the rate would be if you paid another point. It may be worth the extra investment to lock in a lower payment over the life of the loan.

For information on rates and refinancing contact Tim Soldati at First Priority Financial.