Over the last few weeks, mortgages rates [1] reached record lows, which makes me reconsider my mortgage… again. Anybody else feel like every time we refinance (because rates couldn’t possibly go any lower!?), rates again go even lower?
So here we are, with an opportunity to lock in 30 year fixed mortgages at 3.75% or a 15 year fixed at 3.00% with relatively few closing costs.
But will rates go even lower? Will they go higher? Will they stay the same?
Our Current Loan
Our current loan is the 5/5 Penfed ARM at 3.375%. I’ve often referred to the 5/5 ARM product as the perfect 10 year mortgage [2], especially for jumbo loans since the rate isn’t any higher for a jumbo loan.
By the way, if the 5/5 Penfed ARM sounds appealing, it’s currently at 3.125% [3] for both conforming and jumbo loans.
Do the Rates Make You Think?
I’m tempted to ride out our current mortgage, however, the incredibly low rates on fixed mortgages really make me think! In another decade, will we look back at those who locked in fixed mortgages right now with envy?
If we went with a 30 year, I’d have to increase our rate slightly in the short term, with the hopes that it would pay off for locked in rates in the long term. To be honest, I’m having a hard time committing to that psychologically, even though I know my future self would love it.
30 Year vs. 15 Year Mortgage
I’m also considering the 15 year mortgage so that we can lower our rate from the current loan. However, even though paying off the loan quicker is appealing, I have to balance that with my views on leverage.
Obviously a 15 year loan is cheaper in interest, but there is also an opportunity cost to tying up the extra money each month instead of investing it in something else.
Refinancing
Calculations and Considerations. I listed a few of my favorite calculators last time we discussed [4] refinancing [5]. If a refinance will save you money, I think it’s a no brainer from a financial standpoint!
Mortgage Settlement. Some of you may qualify for the new refinance program [6] as part of the mortgage settlement program. However, our lender isn’t one of the banks participating, so I’m focusing on a traditional refinance.
My Considerations
There are a few more moving parts to my own personal refinance situation than a typical calculator, so I’ll run through my thought process with you.
Will we stay? I wish the refinance decision was a simple mathematical exercise, but of course, since every summer I get the urge to shop for a smaller house [7], I have a hard time committing to myself to a refinance of any sort. I have no plans to move at this exact moment, but I can’t promise that won’t change in the next hour!
Moving from an ARM to a Fixed Mortgage. I’ve always been happy with our 5/5 ARM, however, I’ll be the first to admit that it’s easy to be happy about it in an environment when rates are decreasing. If rates start going up, it’ll be a harder sell to remind myself of how much interest we saved in the early years!
Moving from a Jumbo to a Conforming Loan. After running some calculations, I think if we refinance to a fixed rate mortgage, I’ll pay off some of our loan (about $22,000) to make our loan fit the conforming limits ($417,000) to qualify for the lower rates. Of course, once again, there’s another opportunity cost I have to consider, but for just $22k, I think it would be worth it. I calculated that for even a .125 lower rate on a conforming loan, you could finance the $22,000 at 6% and come out ahead. I’d probably just pay it off to keep things simple, but readers know I’d be much more inclined to pay it off with a credit card [8] at 0%.
Subordinating a Heloc. I don’t want to close my Heloc. I know, it sounds stubborn. However, it’s such a great tool for moving money around for my credit card adventures that I’m hesitant to give it up, and it’s also at 3.25%, so I have to consider the impact of closing it for a refinance on my overall financial picture.
Credit Card Balances. While I can pass the current debt to income ratios with my outstanding credit card balances [9], I have talked to a few lenders who think I’m nuts and would prefer I pay it all off to make underwriting “easier”. However, since I have a huge chunk of money locked in for life at less than 3% interest rates, I’d be silly to pay them off. Penfed has been accommodating in the past, but since they don’t have the best fixed rates, I have to consider other lenders.
What is Your Target Refinance Rate?
At some point, there is definitively a financial benefit to a refinance. I spent some time this weekend building a spreadsheet that incorporates all of the above considerations to pinpoint the target number. Unfortunately, the target number is just calculated from a bunch a variables, that all revolve around guesses as to what rates might do.
And then I arrive back at the beginning… Will rates go lower? Will they go higher? Will they stay the same?
I’m thinking that I’ll sit tight for now, but I decided that my target number will be:
A conforming loan at 3.5% with 0 points. If I see that rate with a lender who will subordinate the heloc and let me keep my credit cards in play, I’ll apply. Maybe we’ll see that… maybe we won’t…
What is your target refinance rate?
Watching Rates
I’m currently using the following tools to watch rates: