Lenders won't tell you which mortgage loan product is right for you! It is still absolutely essential for borrowers to do their homework before contacting lenders about refinancing.
Earlier this week, my step-dad who is retired, called me to ask my advice about refinancing. He had already spoken with his lender, Wells Fargo, but wanted to know what I thought before he made a decision. I told him that I thought it is a good time for him to refinance because he has at least twenty-percent equity in his home, his current interest rate is 6.02% and he is approx. 13 years into his 30-year fixed rate mortgage loan. I suggested he consider a 15 or 20 year fixed rate mortgage product (almost all of the major lenders are now offering 20 year fixed rate loans); the interest rates are currently approx. 1% less than 30-year mortgage loan products. Unfortunately, the lender did not recommend a 15 year or 20 year mortgage product to my step-dad. Instead, the lender offered a 30-year fixed rate mortgage loan at an interest rate of 5.02%. Below I provided an analysis of the lender's offer, against my recommendations:
30 year, fixed rate
Loan Amount = $77,000 (closing costs included)
Interest Rate = 5.02%
Est. Property Taxes = $4500
Est. Home Owners Insurance = $550
Monthly Mortgage Payment = $835.13 (includes Principle/Interest/Taxes/Insurance)
Principle & Interest = $415.12
Interest Only = $322.12
Total Interest paid after 30 years = $115,215.20
20 year, fixed rate*
Loan Amount = $77,000 (approx. closing costs included)
Interest Rate = 4.04%
Est. Property Taxes = $4500
Est. Home Owners Insurance = $550
Monthly Mortgage Payment = $889.06 (includes Principle/Interest/Taxes/Insurance)
Principle & Interest = $468.23
Interest Only = $259.23
Total Interest paid after 20 years = $62,215.20
15 year, fixed rate
Loan Amount = $77,000 (approx. closing costs included)
Interest Rate = 4.825%
Est. Property Taxes = $4500
Est. Home Owners Insurance = $550
Monthly Mortgage Payment = $983.66 (includes Principle/Interest/Taxes/Insurance)
Principle & Interest = $562.83
Interest Only = $245.44
Total Interest paid after 15 years = $44,179.20
Most people over 50 should be concentrating on paying off their homes. Likewise, retired people should be doing the same. So, why didn't the lender recommend a shorter term mortgage loan after he was informed that my step-dad is retired and that he was simply looking to reduce his interest rate and his mortgage payment? Because lenders are conducting business as usual. Business as usual means, making the most money for investors, which doesn't equate to doing what's in the best interest of the borrower.
Ultimately, I recommended that my step-dad choose the 20 year fixed rate mortgage loan. His interest rate will be significantly reduced, and he will shave approx. $100 per month off of his current mortgage payment. Consequently, his mortgage loan will be extended an additional five years compared to where he is in his current loan, however, he will have the option of paying an addtional amount towards the principle over time to help offset the additional cost involved (approx. $18,036.00 over the term of the new loan).* With the 20 year loan at 4.04%, he will save at least $53,000.00 over the twenty-year period.
Remember, before you contact a lender about refinancing, establish what is best for you. Look at the numbers and then shop the lenders to find the best loan product for you!
Merry Christmas and Happy New Year!
Taking a look at the pure costs of the various loans is a great starting point for all homeowners who are looking into a potential refinance. However, there are also points, and other closing costs to take into consideration when you are thinking about any type of loan. The costs for an appraisal and title insurance as well as other fees the banks may charge need to be considered. Yes, due diligence needs to be exercised whenever anyone is thinking about purchasing a home, financing a home, making repairs to a home, etc. Shopping for a loan based upon interest rate and monthly payment alone is like going into a car dealership asking for only one of these two things. The lenders and dealerships have so many ways to catch you on the back end.
ReplyDeleteHi Nicole, You are absolutely correct! However, in this blog I wanted to address the fact that borrowers need to establish what their goals are if they are considering refinancing before they contact a lender. In a future blog, I will address closing costs that are associated with refinancing, as well as the pros and cons of paying points. Buying down the interest rate isn't always a bad thing. As you probably know, currently this and other closing costs are tax deductible. Thank you for your comments!
ReplyDeletelove this discussion! This is great stuff. Looking at all the factors is certainly important and it depends on the individual's individual circumstances. I agree that for someone who is retired or about to retire the term of the loan and the monthly costs are probably more important than than the upfront costs (unless they are exorbitant. The future value of those dollars is probably more important to those on a fixed income. Speaking of which, Nadine, can you do a blog on reverse mortgages someday? I see a lot of lenders pushing them on older homeowners. I have also seen people getting into trouble with them.
ReplyDeleteThank you Kathryn, and for your suggestion. I will blog about reverse mortgages in the not-so-distant future. Stay tuned...
ReplyDeleteI wish you success and prosperity in the coming year!
Nadine