Last month, mortgage rates reached their lowest point in three years. The US average for a 30-year mortgage touched 3.49% and 15-year rates reached 3.00%. Since last month, 30-year rates have increased to 3.73% and 15-year rates are up to 3.21% but despite that, rates today are a bargain for many.
Since June 2013, the 30-year rate has been higher than today’s rate 81% of all calendar days. For 15-year rates, it has been higher 58% of the time. If you’ve financed your house with a 30-year or 15-year mortgage in the last six years, odds are you’re paying a higher interest rate than today’s rate.
Data from: https://fred.stlouisfed.org
While lower interest rates may seem like a great reason for a borrower to refinance, it doesn’t tell the whole story. When a bank opens a new mortgage, the relative amount of interest and principal paid on each monthly payment resets. On the first payment of a 30-year mortgage, the interest cost makes up 72% of the monthly payment. By year 6, interest makes up 65% and by year 11, it’s 57%. This heavy up-front cost to borrowing is due to amortization. For the benefit of purchasing something over a certain length of time with the bank’s cash, the bank will ensure it gets compensated on the front end since it bears the risk of you defaulting on your loan. The bank collects 50% of all interest owed on a 30-year mortgage within the first 10 years and 50% within the first 4 ½ years of a 15-year mortgage.
Data from: https://fred.stlouisfed.org
There is a cost to refinancing, aside from the interest you pay – closing costs. To pay the bank to underwrite, appraise your house, administer paperwork, titling, and legal filings, there will be a fee that varies based on your mortgage balance and the bank you choose. Banks will hope that you add that cost to your loan balance so you pay interest on that too, but you can choose to pay that out of pocket. There may be a few banks that don’t charge any closing costs, but you can expect to pay a higher interest rate instead. Whether it’s a higher loan balance and a lower interest rate or a lower loan balance and a higher interest rate, the bank is going to get paid one way or another.
I recommend shopping around to find the best rate and lowest closing costs. I refinanced recently and found the mortgage business to be very competitive, which meant fast and attentive service from all banks I reached out to. You shouldn’t struggle to find a bank eager for your business. As for whether you should refinance, and what kind of mortgage is right for you. . . well, that can be trickier and depends on multiple factors.
At Foster Group, truly caring for our clients means taking the time to learn what’s in their hearts and using proven methods to help them pursue their goals. The financial advisors at Foster Group love crunching the numbers for our clients. Contact us and would be happy to provide a recommendation on your best course of action.