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Mortgage Refi — Silver Lining?

By Terry Savage on March 16, 2020

The chance to refinance your mortgage could be the silver lining in the recent financial upheaval. Even before the Fed cut interest rates to zero, rates on 30-year fixed rate mortgages have remained stubbornly above 3 percent, although you can get a 15 year fixed-rate mortgage for 2.625 percent.

Why are long-term mortgage rates so sticky about coming down?

The answer lies in what’s happening in the mortgage industry. The industry is prepared to handle about $2 trillion of new and refinanced mortgages this year. But with the big rate drop in the bond market, there are about $7.5 trillion of existing loans that potentially make sense for a refi. Two weeks ago, refinancing requests jumped 30 percent in one week, according to the Mortgage Bankers Association.

There is simply not enough trained staff in the mortgage industry these days to accommodate this influx of requests for refinancing. Since the last mortgage crisis, the industry has become far more computerized in its documentation and processing. But at the same time, the requirements about disclosure have become more stringent. It’s actually more difficult to do the paperwork today than it was 15 years ago, despite the new technologies.

The second problem is looming behind the scenes, with the financing sources for these new mortgages. Lenders generally expect about 12%-15% of their mortgages to be paid off earlier than scheduled each year, either by refinancing or being paid off in full. But with today’s lower rates, that number could double or triple this year.

Now, imagine how you would feel if you thought you had a nice 4% return (or higher) coming from your investment portfolio. Suddenly those mortgages are paid off and you’re left with a pile of cash to reinvest just when overall rates are lowest. These lenders are not excited about replacing their old loans with 30 year loans yielding less than 3 percent!

Even worse, the servicers (the firms that send your bills and collect the monthly payments, and pay your property taxes that are collected in the process) can’t earn enough money on the “spread” between the funding rates and the lower mortgage rates to cover their costs. They’re not eager to load up on servicing these new, lower-rate mortgages because they see their servicing profits shrinking to next to nothing!

All in all, the mortgage industry just isn’t very excited about handling your refinancing these days. And to discourage you, they are keeping 30 year mortgage rates higher than you might expect.

That doesn’t mean you shouldn’t try to get a refi on your existing mortgage or home equity loan. Leslie Struthers of GuaranteedRate.com (Leslie@Rate.com) says they are geared up to handle the onslaught of refi requests. But she cautions that borrowers are likely to get a rate lock for only 70 days.

From my perspective, that shouldn’t be a problem. Interest rates are unlikely to rise dramatically in the near future. But the time to start the process is now.

Think about the long term impact of these lower rates in this example from Guaranteed Rate:
• For every $100,000 on a 30 year loan at 3.25%, you’ll pay $435.21 per month in principal and interest, or $56,674.27 in total interest over 30 years.
• For every $100,000 on a 15-year loan at 2.625%, the monthly payment is $672.59 for principal and interest. But the total interest over the life of the 15 year loan is only $21,084.10.

If you can save money with lower rates on a 30-year refi, you might consider switching to a 15 year payoff. It could cost a bit more each month, even at the lower rate, but you could save a small fortune in interest over the coming years. And if your home is fully, or nearly, paid off by retirement, you could eventually take out a reverse mortgage to add to your tax-free income later in life.

Sadly, once you’re retired it’s difficult to refinance. Banks simply won’t give mortgages to people who are not employed, even if you have a regular pension income along with Social Security. That’s a reminder to start the refi process well before you retire, or now if you feel your job may be in jeopardy.

Your home is likely your biggest investment. This is a unique opportunity to make it a better investment, as well. That’s The Savage Truth.

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