Mortgage rates falling - when to refinance?

[berbango]

Hi all,

Looks like the Fed is finally going to start cutting those interest rates! We have a 7% rate on our mortgage and would really love any rate lower than that - but I am wondering how we can get the most bang for our refinance buck out of this.

Of course nothing is promised, but if inflation stays tamped down it seems like the Fed is planning to take rates back down very gradually (over the course of a few years). The situation I'm worried about is spending money to refinance and then an even better rate being available a short time later. What is a good rule of thumb we could follow to not wait too long but also not wait too little? Right now, I'm thinking we refinance when we can get a rate 1% lower, but would love to hear people's perspective.

Thanks!

[yachi]

If you're expecting interest rates to continue on a downward trend, then make sure whatever refinancing you do is done without paying extra for points.  Points are prepaying the interest so that you can have a lower monthly payment.  They only make sense if you're going to have the mortgage long enough to save the money you prepaid, and their benefit goes away if we get even lower interest rates and you refinance.
 
I think the old rule when we have 3.5%-4% rates was refinancing made sense when you could get an interest rate 1/4 point lower.  But I think this was mainly a balance of refinance cost/headhache vs money saved.

[Catbert]

Look at the cost of refinancing and how long it will take to "make" it back.  I'm not sure there is a magic number.  However, if for example. it would take me 5 years to break even and there was a chance I'd move in 3 years, I wouldn't do it.  You also need to consider how much of the "savings" is do to restarting the 30 or 15 year amortization.

[jeroly]

Look into 'no-cost refis' which have no downside at all.  In these, you don't have to pay anything at all to close the loan - no appraisal fee, no points, no mortgage tax, etc. The whole cost is wrapped up in the (higher) interest rate.

They're usually not the best deal if you plan to stay in a place long-term - often you do better by paying fees upfront in exchange for a lower interest rate - but if you can get one of these for a lower rate than your current (or balloon) rate, it's really a no-brainer... you can always refi again down the road if/when a better deal comes along.

[Telecaster]

Personally, I look at the interest savings per month.  Then look at the cost of the refi.   If the break even is around a year-ish, it is probably worth it.   

[sonofsven]

Definitely don't pay for points.
In fact, do a no cost re-fi. This will give you a slightly higher interest rate. Some places will advertise "no cost" but they are just moving the closing costs into the balance due, that's not what you want. You want a true no cost, and to get that you'll pay a slightly higher rate.
When rates hit rock bottom in '21-22, I refinanced four times in a year and a half, each time doing a no cost.
I ended up with a 2.75% 30 year. If I would have paid a little I could have gotten a 1.95% 30 year, but my balance is low enough and the rate is low enough that it didn't move the monthly payment much, and the break even point was something like 8 years.
I was using online brokerages. I found I could pull $2k out of my equity without it being considered a cash back re-fi (which didn't have as good terms).
When rates are falling it makes sense to keep refinancing with them, it's just a paperwork issue.

[berbango]

Look into 'no-cost refis' which have no downside at all.

Definitely don't pay for points.
In fact, do a no cost re-fi.

Okay, these no cost refis sound pretty sweet! Do either of you know where the best place to find them is?

[jeroly]

Look into 'no-cost refis' which have no downside at all.

Definitely don't pay for points.
In fact, do a no cost re-fi.

Okay, these no cost refis sound pretty sweet! Do either of you know where the best place to find them is?

Back when I was looking at mortgage options, I would open to the next to last page of the Sunday NY Times real estate section and there were perhaps 1.5 pages worth of ads across the back three pages of the section. I’d just create a table from the posted rates of all the different lenders.

These days, I’m not sure. I know there are consolidators like bankrate.com where I’m sure you can get an idea of the options, but I’m sure that others here who are more in the know will have better ideas.

[sonofsven]

Look into 'no-cost refis' which have no downside at all.

Definitely don't pay for points.
In fact, do a no cost re-fi.

Okay, these no cost refis sound pretty sweet! Do either of you know where the best place to find them is?

I used online brokers exclusively because they offered better rates. The aggregators like Bankrate will give you an idea of possible rates but they are short on details.
Learn how to read a closing document that shows all the actual costs, you only get one when you apply for a loan
In the re-fi boom years there was a very active thread at Bogleheads where folks where sharing info and their experiences, I haven't been back to look there for years but check to see if it's still active.
The basic premise of the "no cost" is that you pay a slightly higher interest rate and the bank applies a small credit to your closing costs to cover expenses. Some banks will just roll the closing costs into a higher loan balance and call it a no cost; this is why you need to learn to read the closing document where it breaks down all the actual costs.
There will also sometimes be "prepaids" for expenses like insurance and/or property taxes; these are items you would need to pay anyway so aren't considered as extra costs

[GilesMM]

There are always costs to refinance and the costs vary widely and can be ridiculously high.  Don't fool yourself new loans are free of cost simply because the cost is rolled into the loan.  Shop around for the very lowest cost you can find, even if it is not rolled into the loan.  Why pay $5000 plus interest over 30 years to refinance when you can pay perhaps $2000 today?

[jeroly]

There are always costs to refinance and the costs vary widely and can be ridiculously high.  Don't fool yourself new loans are free of cost simply because the cost is rolled into the loan.  Shop around for the very lowest cost you can find, even if it is not rolled into the loan.  Why pay $5000 plus interest over 30 years to refinance when you can pay perhaps $2000 today?

How do you know you will be in the property for 30 years?  If you know you will be moving in just a few years, then avoiding closing costs will save money.

Nobody is saying don't do the math.  However your statement that there are always costs to refinance is false, unless you are counting the cost of your time filling out paperwork, searching for the best rate, etc.  You can refi, keeping the same principal amount (no costs rolled over into the loan), with no closing costs.  Obviously it isn't going to be offered at a rate that is as good as the rates you can pick from if you are paying closing costs (and possibly points) up front, but depending on the timing of your original purchase, might be available at a rate that's lower than what you're paying today, so you wind up paying less than currently and you're still free to continue to look at all the other refi options.

[yachi]

There are always costs to refinance and the costs vary widely and can be ridiculously high.  Don't fool yourself new loans are free of cost simply because the cost is rolled into the loan.  Shop around for the very lowest cost you can find, even if it is not rolled into the loan.  Why pay $5000 plus interest over 30 years to refinance when you can pay perhaps $2000 today?

How do you know you will be in the property for 30 years?  If you know you will be moving in just a few years, then avoiding closing costs will save money.

Nobody is saying don't do the math.  However your statement that there are always costs to refinance is false, unless you are counting the cost of your time filling out paperwork, searching for the best rate, etc.  You can refi, keeping the same principal amount (no costs rolled over into the loan), with no closing costs.  Obviously it isn't going to be offered at a rate that is as good as the rates you can pick from if you are paying closing costs (and possibly points) up front, but depending on the timing of your original purchase, might be available at a rate that's lower than what you're paying today, so you wind up paying less than currently and you're still free to continue to look at all the other refi options.

People are working on stuff, so I 'm sure there are costs like appraisals, credit checks, title searches, and the banker's time.  The question is does it make more sense to pay these upfront or finance them into the mortgage (in the way of a higher interest rate).  You don't always have the option to pay these all individually, so the math gets murky.  Lender A offers a no closing costs loan for x%, but Lender B offers a loan with all these costs for y%.
But I'd support paying $5K over 30 years in order to save $2K during refinancing.  That's my point in telling OP not to pay for points.  You *could* save $5K over 30 years, but you could just as easily find yourself looking at newer lower rates in 2034, just 10 years from now.  Will you have saved $2,000 by then over going with the no-cost option?  My own refinancing story can be an example here.  We bought our house with mortgage #1 in 2010, and have refinanced twice since then.  So a total of 3 different mortgages in 14 years, but all in the same house.  Each of the 2 refinances got us lower interest rates, while one also got us some cash out.  Currently we're sitting on a 3.125% rate, so we're probably not refinancing any time soon again.

[SweatingInAR]

How do you know you will be in the property for 30 years?  If you know you will be moving in just a few years, then avoiding closing costs will save money.

Nobody is saying don't do the math.  However your statement that there are always costs to refinance is false, unless you are counting the cost of your time filling out paperwork, searching for the best rate, etc.  You can refi, keeping the same principal amount (no costs rolled over into the loan), with no closing costs.  Obviously it isn't going to be offered at a rate that is as good as the rates you can pick from if you are paying closing costs (and possibly points) up front, but depending on the timing of your original purchase, might be available at a rate that's lower than what you're paying today, so you wind up paying less than currently and you're still free to continue to look at all the other refi options.

I agree 100%! No-closing-cost refinances are great. I did one in Jan 2021 to drop a percentage point and it only cost me some time and effort. It turned out to be pointless because I sold the house and moved 6 months later, but that just drills home that a true no-cost option is the way to go! They absolutely exist. I really liked nerdwallet's mortgage search engine because I could see rates without entering contact info. Be extremely careful entering contact info to a big mortgage search engine. You'll get a call from every bank on their list.

The median length of homeownership in the USA is about 13 years, and my track record (7 years, 1 year, 2 so far) is way below that! I have been using 5 years as my expected length for any math with the current house.

There are always costs to refinance and the costs vary widely and can be ridiculously high.  Don't fool yourself new loans are free of cost simply because the cost is rolled into the loan.  Shop around for the very lowest cost you can find, even if it is not rolled into the loan.  Why pay $5000 plus interest over 30 years to refinance when you can pay perhaps $2000 today?

They do exist. https://www.consumerfinance.gov/ask-cfpb/is-there-such-a-thing-as-a-no-cost-or-no-closing-loan-or-refinancing-en-141/

Plus, that $2k might be worth $15k after 30 years :-)
https://forum.mrmoneymustache.com/throw-down-the-gauntlet/dont-payoff-your-mortgage-club/

[berbango]

I really liked nerdwallet's mortgage search engine because I could see rates without entering contact info. Be extremely careful entering contact info to a big mortgage search engine. You'll get a call from every bank on their list.

Wanted to thank you for this tip! Got a full 1.15% lower for no cost, and only got called by the company I reached out to. The dream!