Last Call

Credit: Stuart Miles

Three years ago, my wife and I bought a townhome. And, by bought, I mean took out a mortgage for a townhome. At the time, our parents and friends were high-fiving us for the interest rate we got: 4.75%. It was amazing. I mean, there was no way interest rates could get any lower, could they?

Fast-forward to the present: interest rates have gotten lower. To be honest with you, my 4.75% was actually beginning to smell a little as I have casually been comparing it to the mortgage rates that many of my clients  have been sharing with me over the past few months. The rule of thumb is that you are usually wasting your time refinancing if the refinanced interest rate is not at least 1% less than your current rate, but just as I could have never envisioned in 2010, many current interest rates have fallen more than 1% when compared to my 4.75%. Thus, my wife and I are right in the middle of doing what I have advised many clients to consider doing over the past few years: refinancing.

So, why all the fuss this week? Why not another post on what you should do after you have a kid, why you should check your engine now, or how to make sure you can survive mayhem? Because I personally think interest rates have, to quote the musical Oklahoma!, “gone (down) about as far as they can go.” Think about your checking account interest rate – it’s pretty close to 0%. Chances are that, unless you have refinanced within the last three years, current refinancing interest rates are probably worth your looking into. And you should look into them soon because the housing market is beginning to pick up a little steam, and the Federal Reserve has recently started signaling that the Fed could be thinking about scaling back their bond-buying program (many economists believe the Federal Reserve’s bond-buying program has been artificially keeping interest rates low).

If you heed my advice and look into refinancing, let me share a few tips that I think you will find helpful:

• Reach out to multiple lenders, including your current mortgage holder. The rates and fees will likely be very similar, but it’s worth talking to several lenders before you proceed as a sanity check just to make sure the particular lender you are considering is shooting straight with you. A crafty representative or two may try to pressure you by saying that “rates could change by the end of the day,” but don’t let that bother you; being thorough and comfortable is likely more important than one day’s worth of difference in rates and fees. Also, rates and fees aren’t necessarily going to get worse in 24 hours; they could improve, but not all loan representatives will mention that...
• Your current lender could offer a smoother transition than someone new, but if there is a relative tie in rates and fees, I would lean towards whoever seems the most knowledgeable and responsive, and offers the best customer service.
• Try to have some idea of what you are looking for before you call a lender. Are you looking to refinance into a 30-year mortgage? Are you looking to go from a 30-year mortgage to a 15-year mortgage? Are you planning on owning the property for the life of the loan? The more you can tell the potential lender upfront, the more specific and helpful information they will be able to quickly provide. Don’t worry though, because after you practice on potential lender #1, you will be much more comfortable when you reach out to potential lender #2!
• If it were me, I’d ask lenders for three scenarios: their lowest interest rate possible (will likely require additional money from you at closing, but gives you the best interest rate), a no-closing cost scenario (don’t let the name fool you - there will be fees, but you will likely pay less at closing and your interest rate will only be a little higher than the lowest rate), and a lowest total dollar amount scenario (kind of a happy medium between the lowest interest rate and no-closing cost scenarios where you pay a little at closing and get an interest rate between the lowest rate and the no-closing cost rate). This will likely give you three, pretty-solid options to consider as you decide what is best for your particular financial situation.
• Finally, know what you’re getting into. Refinancing can be a nuisance to the posterior, if you know what I mean, but going through the process can offer some real financial benefits. If you go forward with refinancing, you will have to provide tons of documentation, answer lots of seemingly ridiculous questions, and sign numerous forms relatively quickly. Don’t get overwhelmed, though. Take a deep breath, respond as quickly as you can, and by all means, carefully read what you are signing.

Sadly, Donna Summer’s Last Dance came to my mind as I started writing this post because I was thinking about the possibility that right now could be the last chance for many of us mortgage holders to benefit from these historically low interest rates. Have no fear though, since hearing from my soon-to-be new lender that my wife and I have been approved for a new mortgage (that’s even more favorable than the one we got in 2010), I’ve found myself humming Semisonic’s Closing Time.

What? Don’t judge. If you refinance, you might find yourself singing, too!

-Tom