Twice we underwent a mortgage refinance during our seven years of home-ownership in the US. The first mortgage in 2003 was a 7-1 ARM at 5.25%. Mortgage refinancing offers below 5% started pouring in within a few months of signing the papers. We resisted initially for it was our impression that the closing costs would eat away whatever savings surfaced. The next solicitation for mortgage refinancing came a few more months later at an unheard rate of 3.25% - an ARM product with an interest-only payment schedule for the first year, and adjustments every 6-months based on the MTA index with a 2% margin. The triple icing on this offer was no closing costs, fees, or points. Skepticism took this deal away for we expected it to have hidden clauses or caveats. A few months later we signed up for a 5-1 ARM at 4.5% brought forth by a mortgage broker with the same terms – no closing costs, fees, or points. A refinance mortgage broker sells mortgages on behalf of national lenders for a commission from the lender (typically 1-2% of the loan amount). Generally they abstain from seeking commission from the borrowers. These refinance mortgage brokers have the flexibility to package a mortgage product as a no cost, no fee, and no point one by quoting a slightly higher interest rate than otherwise possible. Below is a look at the average 5-1 ARM rates over the last decade:
A common misconception surrounding mortgage refinancing is the belief that refinancing favors only those with a protracted interest in a property. The basis for this impression is that the life of the mortgage may not be long enough to recoup the closing costs and NPV (Net Present Value) of future cash flows. But, as detailed above, mortgage refinancing options at no-cost, no-fee, no-points do exist – the downside is higher interest rate. This repacking by brokers can be manna for short-term owners provided the interest rate offered is lower than their current rate. Our brush with refinancing to a no cost, no fee, no point loan for 4.5% from 5.25% immediately reduced the monthly payments by a few hundred dollars! Ensure the “No Prepayment Penalties” clause is in place as otherwise the penalties can easily obliterate any savings realized.
When it was time to finance our second home purchase, we approached the same mortgage refinance broker. This time around it was not smooth operation – the MTA 1-year ARM rate was adjusted upwards to 3.625% and a 0.25% “point” was charged in spite of the broker’s promise that the deal would be no-cost, no-fee, no-point at 3.25%. Lesson learnt – even with the same mortgage refinance broker, the responsibility is yours to double check the terms. That aside, it was the golden period in terms of cost of ownership as the monthly interest-only payments (no negative amortization) was below what we paid as rent for an apartment half the size in a much less desirable neighborhood. The deal still came ahead when the equation was modified to include parameters like tax benefits and fixed costs like HOA, insurance, and property taxes. We held on to this deal for 12 months. The window of opportunity with these kinds of ARM mortgages was fast shrinking as their interest rates were catching up with the 5-1 ARM counterpart. Choosing to err on the side of caution, we refinanced with a 15-year fixed mortgage at 5.375%. This time we were careful to use the services of a different mortgage refinance broker who offered a no cost, no fee, and no point option. In retrospect, as mortgage refinancing rates would remain relatively low for years, it would not have burnt us even if we had held on to the MTA 1-year ARM mortgage – the monthly payments would have fluctuated as the underlying index varied between a low of just 0.4% in May 2010 and a high of 5.03 in April 2007 (2.4% to 7.03% interest rate at the 2% margin). The risk that the mortgage refinancing rates for conventional rates would go up and then the only option would be to refinance at a higher rate never materialized during that period. Below is a look at the MTA index over the last ten years - the actual mortgage rate is around 2% more than this index value (margin):
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Last Updated: 03/2012.
A common misconception surrounding mortgage refinancing is the belief that refinancing favors only those with a protracted interest in a property. The basis for this impression is that the life of the mortgage may not be long enough to recoup the closing costs and NPV (Net Present Value) of future cash flows. But, as detailed above, mortgage refinancing options at no-cost, no-fee, no-points do exist – the downside is higher interest rate. This repacking by brokers can be manna for short-term owners provided the interest rate offered is lower than their current rate. Our brush with refinancing to a no cost, no fee, no point loan for 4.5% from 5.25% immediately reduced the monthly payments by a few hundred dollars! Ensure the “No Prepayment Penalties” clause is in place as otherwise the penalties can easily obliterate any savings realized.When it was time to finance our second home purchase, we approached the same mortgage refinance broker. This time around it was not smooth operation – the MTA 1-year ARM rate was adjusted upwards to 3.625% and a 0.25% “point” was charged in spite of the broker’s promise that the deal would be no-cost, no-fee, no-point at 3.25%. Lesson learnt – even with the same mortgage refinance broker, the responsibility is yours to double check the terms. That aside, it was the golden period in terms of cost of ownership as the monthly interest-only payments (no negative amortization) was below what we paid as rent for an apartment half the size in a much less desirable neighborhood. The deal still came ahead when the equation was modified to include parameters like tax benefits and fixed costs like HOA, insurance, and property taxes. We held on to this deal for 12 months. The window of opportunity with these kinds of ARM mortgages was fast shrinking as their interest rates were catching up with the 5-1 ARM counterpart. Choosing to err on the side of caution, we refinanced with a 15-year fixed mortgage at 5.375%. This time we were careful to use the services of a different mortgage refinance broker who offered a no cost, no fee, and no point option. In retrospect, as mortgage refinancing rates would remain relatively low for years, it would not have burnt us even if we had held on to the MTA 1-year ARM mortgage – the monthly payments would have fluctuated as the underlying index varied between a low of just 0.4% in May 2010 and a high of 5.03 in April 2007 (2.4% to 7.03% interest rate at the 2% margin). The risk that the mortgage refinancing rates for conventional rates would go up and then the only option would be to refinance at a higher rate never materialized during that period. Below is a look at the MTA index over the last ten years - the actual mortgage rate is around 2% more than this index value (margin):
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Last Updated: 03/2012.
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