Today we’re going to review 5 of the most common excuses I hear from folks with high rates who are refusing to refinance. Why would I post a seemingly salesy blog like this? Really it’s out of frustration. I had a conversation this AM with my uncle and mortgage rates came up – apparently his 30yr fixed has a 7.75% rate – which he is completely fine with. During our conversation he provided me all sorts of facts on why it wouldn’t be wise for him to refinance; unfortunately for him, none of his facts were true. After clearing up all his misconceived notions, I returned to the office and sent him an email with a cost analysis in it – I think now he’s completely changed his tune. I thought to myself – “I should blog this…” – so I am. – I know that this is not the easiest topic to wrap your head around, but it’s absolutely necessary to understand the basics so you’re not letting misinformation stop you from making smart financial decisions.
1. The process takes too much time and is too much of a hassle.
I’m going to break this down into what, in my opinion, a realistic estimate of your time commitment should be. The upfront document gathering should take 60min (more info in this post). I would consider myself a semi-organized person, I don’t overdo it, but I would have no problem furnishing the requested items in a very short period, as most people could and do every day. After you email or mail those items in, you’ll receive a loan application and disclosure package in the mail; signing and returning this package should take no longer than 30min. After that – the only other time you’ll need to invest into the transaction is at the closing which can take anywhere from 30 to 45 min. So, on the high side, we’re right at 2.25hrs of time you’re going to need to set aside for the process. The other time killer to consider is your shopping technique. The average person will contact 3-4 institutions (a bank, local credit union, and a broker or two) and then make their decision from the quotes provided. The rates they receive will be pretty similar as will the cost of the transaction. On the other end of the spectrum, you have the folks who miss out on the low rates because they spend 3-4 weeks comparing dozens of quotes from untold amounts of lenders. The moral of the story, this can be as fast and easy as you make it – it should realistically consume no more than 5 hrs of your time even though it will take us 30 days to close your loan.
2. It’s going to hurt my credit if I’m denied.
I’m faced with this comment/question quite a bit throughout the course of the month, the answer is no. Although you’re supposed to keep your shopping period to 14days or less for multiple lender inquiries not to affect your score, just the act being denied does not affect your score.
3. I’ll wait until rates are a bit lower.
Check out this graph that follows the 30yr fixed rate average over the last 5 years. We’re at the orange marker, early January after the market crumbled is in pink. How will the next few months or years look? We’re not sure but it does appear we’re on our way out of the trough we’re currently in.
4. I don’t want to start my term all over again.
Your term, whether it’s a 30, 15, or 10, is really the maximum amount of time you have to pay back your balance. With conforming loans, you don’t get penalized if you pay off your loan faster, and you’re really just being given more time to pay off the loan when you refinance for the same term loan. The easiest way to explain this is to use a sample situation. Let’s say Bob got a $200k loan at 6.75% when he bought his home 10 years ago. He’s been paying his regular mortgage payments the entire time and he’s recently heard that rates are quite a bit lower so he’d like to refinance. Bob’s current balance is right at $167k. Assuming he’s just going to pay for the refinance out of pocket, his new loan will be for $167k at 5% for 30 years. He still owes the exact same amount, is paying about $2900 less interest every year, but is under no obligation to keep the loan for the entire 30 years. There are no pre-payment penalties for conforming loans. I noted in my previous post about paying extra each month – If Bob decides to keep paying his old payment, ie reinvesting his savings, he’ll pay off his loan in 17 years.
5. It’s not worth it for me to refinance.
This really depends on how long you’re looking to stay in your home. Moving in 4-5 years, most likely not – staying for awhile – take a closer look because you could be missing out. Day after day I prove with hard numbers why and how refinancing into a lower rate or a different product can save people money. The best example I have of this is when I showed my dentist how much he could save. Mr. P knew that he wasn’t going anywhere in his home, had already remodeled his kitchen and basement, and was quite sure that he wasn’t going to be modifying his mortgage for the rest of his term – but still asked every now and again how rates were. When they reached 4.75%, I emailed him the following cost/savings analysis.
By dropping him down .75%, he’s saving $1890 a year, and his savings start catching up to him 25 1/2 months after he shells out that $4k for the closing costs. That small drop in rate saves him almost $82k worth of interest over the life of the loan. Think it’s not worth it? Why not let us prepare a cost/savings analysis before you decide.
1350 Sunday Dr
Raleigh NC 27604