After a few years of higher than (recently) normal mortgage interest rates, some homeowners wonder- is it time to refinance their loan?
This week, I caught up with Mike Echery, a mortgage broker with Greenlight Mortgage. He let me know that for some homeowners, a refinance of the mortgage they took out over the last couple years can make sense.
Read on below for details-
Our most recent peak of interest rates was in October of 2023. At that time, we saw rates of around 7.7% for a 30-year, fixed-rate mortgage. That was an abrupt departure from the extremely low interest rate environment of the early 2020s. Rates bottomed out in January of 2021 at about 2.7% as the FED tried to encourage homeownership and investment during the COVID years. This week, for borrowers with 20% to put down on their loan and a credit score over 780, rates are coming in at about 6.125%.
Mike told me this week that for those homeowners that purchased a couple years ago and that have an interest rate of around 7%, it is a good time to consider a re-finance. He said he always starts with considering how quickly the borrower would break even on their new loan. While a re-finance and drop in interest rate will undoubtedly result in a lower monthly payment, there are costs associated with the re-fi.
Typically, the borrower will pay for around $1,200-1,800 in closing costs and title fees. Lender fees will run around $1,500-2,500. Mike says that typically he is looking for the borrower to break even on these costs somewhat quickly- in about 1-2 years and if this is the case, he recommends the refinance. If the break even horizon is a longer, he typically recommends that homeowners wait for rates to drop lower before pursuing the re-fi.
Mike says in other instances, he offers what is called a "no-cost" refinance. In this scenario, the borrower proceeds with the refinance, lowers their rate some, but takes a slightly higher rate than they might otherwise qualify for. Since the borrower is taking a slightly higher rate, the lender pays for the closing fees. This approach saves the borrower from having to use their cash to complete the re-finance and still lowers their monthly payment.
Mike also mentioned that some of the age old wisdom about re-finances doesn't make sense any more- especially in our area where we have higher than average home prices and loan amounts. He said you can find some advice online that says you need to wait until you can get a 1% rate differential for a re-fi to make sense. So if you have an interest rate at 7%, you would need to wait until rates fall to 6% or below for a refinance to make sense. Mike said this calculation is very price dependent, meaning that for a loan above $1,000,000, even a 1/4% rate drop can make a big monthly payment difference. On that same note, a 1/4% rate drop on a loan amount of 300K won't move the needle enough to be worthwhile. When in doubt, call your trusted lender or reach out to Mike here.
As always, if you have questions for us please don't hesitate to reach out. Until next time!
Allison and Ken
