Should I Refinance? Do the Math!

DO THE MATH-A Real Estate & All Things Related Column
By Terry Akiyama, Contributor
May 6, 2013 Updated: May 7, 2013

Here is a “quick study” sheet:


Conforming (UP TO $417,000 loan amount) IS above 3.75% –
High Balance (UP TO $625,500 loan amount) IS above 4.25% –
True Jumbo (Above $625,500 loan amount) IS adjustable or over 4.25% –

Conforming Loans (Up to $417,000 loan amounts)
$400,000 at 5.00% = $2,147.29 monthly payment
$400,000 at 4.50% = $2,026.74 monthly payment
$400,000 at 3.99% = $1,907.36 monthly payment
$400,000 at 3.75% = $1,852.46 monthly payment
$400,000 at 3.49% = $1,793.94 monthly payment

On April 12, General Mortgage Capital Corporation (for example) was offering an advance rate locking 3.490% (3.674 APR) (30 year fixed rate) on a “no out-of-pocket costs” basis. This means that all “non-recurring closing costs” were covered by a credit from the Lender due to that day’s interest rate pricing. Your scenario may have aspects that cause higher “cost,”—I can go into detail, call or email if you want me to. 

I am using the term “no out-of-pocket costs,” NOT the commonly utilized terms: “no point/no fee” or “no cost.” For your education and edification: Let’s quote the Department of Real Estate in this regard, first thing:

“In addition to the above examples, which are based on specific subsections of the regulation, phrases and words used in advertising can be misleading in themselves. ‘No Cost’ loans and ‘No Fee’ loans are such words. All real property secured loans have certain inherent costs, such as title insurance, escrow, appraisal, recording fees, etc. These services are bought and paid for by the borrower in all loan transactions. In the case where a broker arranges a premium priced loan where a lender rebate is used to pay for these services, the services are still performed and the costs incurred. The borrower pays the costs of the services via a higher interest rate than would be available if the borrower paid for the services out-of-pocket. In effect, the borrower finances the closing costs over the entire life of the loan. Although there may be no out-of-pocket costs to the borrower, clearly there are fees and costs involved, contrary to the claims of these ads.” Understood?

Here’s the bottom line. If you think you’re already sitting pretty at 3.75% or higher, let’s use 3.99% versus 3.49% (3.674% APR) with all non-recurring closing costs and loan points covered by Lender Rebate, hence, no “out of pocket” costs, which was “real” on April 12. Would you not like an additional $113.41 in your pocket each month? Or keep making the higher payment (after refinancing to the lower rate) and shorten the length of the loan, in other words, pay off the mortgage earlier, build equity faster. 

And this is if you are currently at 3.99% If your current mortgage rate is higher, your monthly savings will be even higher and what are you waiting for?

The Mortgage Bankers Association was forecasting a raise in rates throughout 2013; April 12 was quite a rate dip but the MBA contends “the low rate mortgage party could be over in the last quarter of 2013.” Next loan amount category:

High Balance/Agency Jumbo up to $625,500 Loan Amounts:
Next we discuss the $417,000 and higher loan amounts, these days known as “High Balance Conforming, Agency Jumbo Loans, etc.” 

Using for example, $550,000 at 3.875% depending on the time of day and the other aspects of your loan scenario, for the most part was available. At (4.012 APR) 3.875% = $2586.30 monthly payment on a “No out of pocket costs, Lender’s Rebate covers all the non-recurring closing costs,” HENCE: If your $550,000 mortgage is currently at 4.250% = $2705.67 that’s an additional $119.37 that could be in your pocket every month or funding an additional retirement or investment account. You are at 4.75% currently, you say? So you’re paying $2869.06 a month, when you could be paying $282.76 LESS EVERY MONTH? Put another way, you could shorten the term of your mortgage by 6–7 years, shorten by 84–96 months (over $275,000) in monthly mortgage payments by continuing to make your current 4.75% mortgage payment on a refinanced to 3.875% rate mortgage.

Of course, many of you have already refinanced and you realize the benefits of what I am talking about here. 

Let’s recap thus far. If you have a “Conforming Loan,” which is a loan amount at or below $417,000, and your interest rate is above 3.75%, say 3.99%, on April 12 you could have locked in a lower rate, saved at least $100 a month and accomplished this with no “out-of-pocket” cost.

If you are on a “High Balance/Agency Jumbo Loan,” which is a loan amount up to or below $625,500, and your rate is above 4.25%, you could have locked in at 3.875%, again on a “no points/no fees” program which would give you $119.37 a month to fund an additional retirement/investment account and again this was readily available without points or non-recurring closing costs. Above 4.25%? Call one of the fine mortgage brokerage or banks that advertise, actually call three of them and pick the one best suited to your tastes and style. You better do that NOW.

“Good” JUMBO LOAN PROGRAMS have been few and far between the last few years but are beginning to return. Now let’s talk about JUMBO LOANS, those loans that exceed the $625,500 loan amount. If your Jumbo Loan is above 4.00% or you would like to convert an ARM (Adjustable Rate Mortgage) to a 30-year fixed rate, there WERE Lenders pricing 3.875% (4.0346% APR) as a “non-recurring closing costs covered by a Lender’s Credit” at least on April 12 that you could have “rate locked” in for 30 days. So let’s say your $900,000 mortgage is at 4.375% and you’re paying $4,493.57 a month, principal and interest. Well HELLO, at 3.875% you are at $4,232.13 and pocketing $261.44 instead of GIVING IT TO THE BANK. Why give the bank an extra $261.44 a month when you could be contributing further to a compounding interest on an investment or retirement account? Your Jumbo 30 year fixed is not likely as low as 4.375% in the first place. Even more reason to: DO THE MATH. OR CALL ONE OF THE ADVERTISERS. OR CALL ME.

Q/A/Concerns Addressed: You’ve been making payments on your current mortgage for a few years and you are thinking that you don’t want to get started all over on a 30-year mortgage even with a lower rate. Chances are, the lower interest rate result of refinancing offsets restarting the 30-year term. It’s a good bet that if you continue to make your current, before refinance mortgage payment to a lower rate/payment after refinance, that you will likely pay off sooner than if you keep the current mortgage. Do the math, have someone do the math for you, or call me and I’ll do the math for you. My intent here is not to go into tedious detail but simply to nudge you into the right direction. 

“No points/No fees,” sounds good and has a nice ring to it but should I pay points and fees to get an even lower rate? DTM (Do the Math). Take the points and fees you’re contemplating paying for the lower rate, calculate the monthly payment savings from the “no out-of-pocket cost” refinance mortgage rate’s monthly payment and divide that monthly savings amount into the closing costs you are paying for the lower rate. This will tell you how many months it takes to recapture what you paid and determine when you will truly achieve the monthly savings you are paying for. (If you save $100 a month by paying $3,000 in closing costs, $3,000 divided by 100 = 30 months to “recapture the closing costs” or 30 months before you are really “saving” $100 a month on your mortgage.)

When rates go up and paying points/closing costs is more common, I will go into further detail in a future column. The average Californian I am told, moves every 5 years on average, so you do need to keep in mind that the savings over 30 years may not be relevant and you stick to “no out-of-pocket cost.” 

The purpose of this edition’s column is to tout the savings you can achieve without having to pay points, fees, and closing costs, aka “no out-of-pocket costs.” If your rate is over 3.990%, refinancing is a DEFINITELY a valid consideration. Call one of the many fine mortgage brokers or lending institutions that advertise in this paper RIGHT NOW or at the latest, first thing tomorrow. After you refinance, donate one month’s savings to your favorite non-profit for karmic benefits, see about direct depositing or “automatic debiting” that monthly savings and put it in a separate account for funding a retirement or investment account. Budget a nicer lunch or dinner a day or two a month. If you were walking about and noticed a $100 bill on the ground, would you not pick it up and be thanking your lucky stars?

Do the Math. 

© Terry Akiyama 2013 

Terry Akiyama is District Manager and Senior Loan Officer at General Mortgage Credit Corporation, DRE 01165275, NMLS 289770. Terry has over 20 years of experience in residential and commercial mortgage originations along with financial planning. 

Terry previously worked with Barclays Bank, Wells Fargo Bank and Sumitomo Bank in addition to a number of mortgage brokerages. Terry attended the University of Hawaii, then the University of San Francisco. He brings to this column a depth of knowledge, experience, resources, and strategic contacts. Terry is confident that he offers the finest in residential and commercial mortgage lending services. Terry is writing this column to truly EDUCATE and entertain.