Are you missing the ‘Golden Era’ for an opportunity to refinance?

Short answer: Current market and personal conditions are leading Monica and me to consider refinancing right now.

 

Long answer: This decision depends on many variables that are unique to you.

 

First off, I’ll give you the background of our situation and the reasons for our decision to say ‘yes’ or ‘no’ to refinancing, then I’ll cover the important factors to evaluate when considering a mortgage refinance of your own.

 

Where we’re at

 

We bought our house in March of 2015 with an ARM (Adjustable Rate Mortgage). Initially, this option sounded great for where we were financially. The rate was incredibly low, 3.875%, and would remain fixed for 7 years. This would’ve kept us at 3.875% until March 2022, and then we’d have a significantly smaller balance and only 23 years left on the term of the loan.

 

The downside

 

That whole “Adjustable Rate” thing had me concerned. I knew we’d have to refinance our loan eventually, because of the loan’s ability to fluctuate to a position much higher than our measly 3.875%. But I figured we’d be able to put off refinancing for a few more years, at least.

 

What changed

 

Average interest rates on home loans were at their lowest from late 2012 through the end of 2016, as compared with anything since 1970. And I don’t think they’re staying there for long. Spoiler alert – my opinion is not a unique one.

 

“Hey, man, we’re still in 2016. What are you talking about?”

 

Let me give you some background. During the 90s, the average interest rate for home loans was 8.118% (the same source used throughout this section).

 

The 2000s – 6.292%

 

2010 – 2015 – 4.133%

 

My parents always told me the story of their first home purchase, and it went something like, “I cried when I saw that interest rate. It really limited what we could afford.”

 

1983 (when my parents were doing their home purchasing) – 10.65%. They paid $670 monthly (including taxes and insurance) on a $68,300 loan over 30 years. Wow.

 

Step back from the ledge. I’m not saying we’re touching 1980s rates anytime soon – man I hope not, anyhow. But it is looking more like a gradual rise over the foreseeable future.

 

With an ~800 credit score and favorable debt-to-income ratio, Monica and I are currently seeing quotes for 4.375% from the most reputable companies (Joe King at Farmers Bank – 330-718-3911 has been our go-to if you’re interested), while other – less renowned – organizations are offering near 4% rates.

 

What other evidence do I have for rising rates

 

Well, aside from a quick google search and a multitude of supporting articles from reputable sources, I like to take my information straight from the horse’s mouth.

 

My college football coach always said, “I’ll believe what I see.”

 

This was in response to our injured teammates telling him they’d be healthy enough to play in the game that weekend, in spite of not practicing all week. Or, from guys making mistakes in their personal lives and insisting it wouldn’t happen again.

 

“Believe what you see.”

 

Well, the Federal Reserve (Fed) recently hiked interest rates for the second time since the Great Recession (2007-’08). What’s more, Janet Yellen (Chairwoman – Fed) and her colleagues have made indications that future hikes are ahead in the not-so-distant future.

 

What does this mean for us

 

Borrowing money to buy a house now becomes more expensive.

 

Borrowing $200k, for example, at 3.875% vs. 5.5% over 30 years results in a difference of $70,237.38 in interest!! That’s $138,570.70 vs. $208,808.08, for those keeping track. Again, in interest!

 

This can have drastic effects on one’s ability to buy a home. A higher cost to borrow could lead to stability or increase in the renting market, accompanied with a lull in home purchases. Both of which have the potential to stagnate or reduce current home values.

 

If you add rising interest rates with a less desired (thus less valuable) home, those of us with ARMs could be in for a world of hurt.

 

So what are some factors to consider when weighing a mortgage refinance

 

Closing costs

 

Refinancing, by itself, could cost you anywhere from nothing to a few thousand dollars. Regardless of your home value, $5k will make some difference.

 

Interest rates now vs. later

 

“Are you feeling lucky, punk?” Tributes to Clint Eastwood aside, nobody knows for sure what interest rates will be in 2022. The could be similar to where they are now or they could be much higher (I don’t see them going much lower). So, either way, you’re gambling. Do your research and determine what you expect the most likely outcome to be. My uneducated guess – somewhere around 5-6% (Yes, that’s a hopeful estimate by me).

 

loan to value ratio

 

How much of your home is still borrowed? Would refinancing eliminate PMI (private mortgage insurance), which is an additional payment made on home loans where less than 20% of the home’s value is owned by the buyer? Do you owe a minimal amount, thus reducing the benefit of refinancing? Will your home’s value rise or fall over the next decade? Either way, this affects your decision.

 

Time until you’ll move/ability to move

Will you still be in this house after 5 years? 10? If you anticipate moving somewhere in that timeframe, would the guaranteed lower rate be worth the price of additional closing costs? And if you’re moving, there’s no real reason to pay for long-term stability on your current home’s loan. Deal with that when you buy the new house.

 

Monthly payment

If refinancing is an option for you, depending on old versus new interest rates, your monthly payment is likely to change. Could the monthly budget afford the higher payment for either a higher interest rate or shorter term loan? Or, if refinancing would reduce your monthly payment, maybe you should consider a shorter loan term.

 

Ultimately, which scenario is most favorable to your unique situation? 

 

A short-term ideal position followed by a future of uncertainty and potential disaster (ARM), or

 

Paying the slightly higher price now for a future full of stability and constant monthly payments, only affected by taxes and insurance (Refinancing to a fixed-rate mortgage)?

 

Our decision

 

We have 3 priorities when it comes to large-scale debts. In order of importance: Student loans (highest interest rates and highest burden), home mortgage (a necessary evil), and the potential for future business loans (currently nonexistent but could have the potential to positively impact the 2 other debt types).

 

Side note – check this article out if you’re interested in some benefits to having a mortgage.

 

With our mortgage interest rate locked in through 2022, Monica and I are confident that the student loan debts can be significantly reduced, if not eliminated. When eliminated, that frees up 20% of our current monthly income to either put toward paying off the mortgage faster or giving us the ability to afford a higher interest rate.

 

I hear you and yes, I hate the thought of paying more for something that just recently was costing much less. However, when you add in 20% of your take-home pay to put toward paying off the loan faster, that interest rate will have much less time to affect our overall payment amount.

 

All of these factors make me want to kick the mortgage can down the street another 5 years and deal with the situation as it stands then, as opposed to definitely paying a higher rate now for a house we may or may not be living in during the 20s (20s – that’s awkward to write and think about).

 

What are your thoughts?

 

Hopefully, this article at least sparked some interest in buying or refinancing, and if you’re strongly considering either, what are your opinions? I’d love to hear your point of view.

 

Thanks for reading!

 

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I’m glad you’re here. Thanks again and talk soon!

 

– Mike
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2 Comments

  1. Thanks Mike, I think I missed the part as to why one might decide to go with a higher mortgage rate? Good information in regards to refiing –

    That’s 20’s remark – I could see it being “roaring” in retrospect – mebbe?

    1. Caleb, thanks for reading and for your comment. If I’m understanding your question right, we’re basically deciding between the lesser of two evils. The consensus in rising interest rates means that we’d either pay slightly higher now for long-term stability, or, keep things constant now until our rate begins to fluctuate (2022). At that time our rate would gradually change closer to the current market conditions, and if average rates are higher then, ours would head up.

      Let me know if this doesn’t address your question, and who knows? Maybe you’ll be the subject of my next Mailbag post?!

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