Help Me Understand My Mortgage Re-fi Options

December 4, 2008 5:33 PM

We're refinancing our home mortgage and want to know if you think we should jump now or wait, considering recent news about mortgage rates dropping further based on supposed guarantees by Freddie and Fannie.

This is a jumbo loan ($600K+) ... the current rate we are quoted is 5.5% for a 5-year adjustable, interest-only loan -- down from 6 and an eighth just a few weeks ago. There are no penalties if we decide to re-fi again in the months ahead, but we obviously want to lock in at the best rate now. There were some headlines over the last couple of days about rates dropping to 4.5% or even lower. This is all mystifying to me because I'm not a numbers guy and I have no idea how to read the market. I concentrate on my monthly hit at that's all. Pull the trigger now or wait?

posted by terrier319 to work & money (4 comments total)

According to this article about the proposed mortgage subsidies:

Under a plan that top Treasury officials are weighing, the Treasury department would underwrite tens of billions of dollars worth of 30-year, fixed-rate mortgages at rates far lower than most Americans have ever seen.

...

But the cheap mortgages would only be available for people buying houses, not the roughly 50 million families that already have mortgages and would want to refinance at a lower rate.

So your mortgage refinance wouldn't qualify for the lower interest rate; the real question for you is whether the lower rates might "trickle down" to your loan. Since you can refinance again for free, I can't understand why you would wait. Grab a good rate now, and if it gets better you can refinance again then.

(And I know you aren't asking this, but given that interest rates are already really low, and there are these proposals to lower some even further, I hope you have a really compelling reason to not lock in these rates with a regular fixed rate mortgage. If you intend to keep the house long-term, it strikes me as likely that rates will rise over the five year loan term you are talking about, setting you up for higher costs in a few years.)
posted by Forktine at 6:17 PM on December 4, 2008

There are no penalties for terrier319 to refinance ahead, but there would be closing costs on every refinance. So it's not a completely "riskless" transaction in that sense, there will be costs involved.

It is likely that the rates will continue to go down, at least for a while (see http://www.bankrate.com/brm/static/rti.asp?caret=1 for the opinion of experts. Right now 62% think it's going down further, only 7% think it's going to go higher), but as Forktine mentions any further drop may or may not carry over to a refi loan, especially a jumbo one. So, there is no obvious answer.

You can usually lock rates in with lenders for some time without actually committing to the loan. I would explore that option, this would give you a week or two to see what direction things are moving.

Finally, I think Forktine is absolutely correct: I think you should explore a 30 year fixed rate mortgage. Right now the interest difference between a 5 year adjustable and a 30 year fixed mortgage is almost negligible (might depend on the provider though). Even if there were a small premium, it would be worth it. Unless you are 100 percent certain that you will not be in this house in 5 years, it would be worth going with a fixed mortgage.
posted by tuxster at 8:45 PM on December 4, 2008

I concentrate on my monthly hit at that's all.

That, my friend, is how we all got into this mess.

Interest rates could and may well go lower. But consider that the lower they are, the higher they have to go. In the 1980s mortgage interest went into double digits!

ARM is very risky. Go with fixed.

Interest-only seems like the wrong thing to get out of a refinance. You want to start buying equity instead of scraping by.

Just go to Bankrate and start reading around. You need to know a lot more than you do.
posted by dhartung at 10:06 PM on December 4, 2008

The interest rate changes being suggested are (to my knowledge) directed specifically at first-time home owners in order to reduce the glut of houses on the market. If you already have a mortgage, that ain't you.
posted by Civil_Disobedient at 11:07 PM on December 4, 2008