I’m on a personal crusade to get as many Americans as possible to refinance their homes. I don’t get anything out of it, I just want to help people save some cash. A lot of us have mortgages, but not everyone is as obsessed with rates as I am. So, consider this a friendly nudge to save some money every month for the next 5 to 30 years.
I didn’t have anyone to give me that nudge when I refinanced, which is why I ended up paying 0.125% more than I should have. I hesitated and it cost me. Banks have deals all the time. It’s your job as a borrower to figure out which banks are offering the best terms at any given time.
I’ve had good experiences with Citibank and Wells Fargo. They often have mortgage rates that are 0.5% cheaper than other competitors for 5/1 and 30-year mortgage products. They’re on a mission to build up their loan book again. As good citizens, we should spread the word and make sure we don’t make the same mistakes again!
The biggest obstacle to refinancing in America is the loan-to-value (LTV) ratio of your house. I’ve talked to several people who are struggling to refinance because of this. If you’re not familiar, banks usually have a maximum LTV of 80%. So, if your house is worth $1 million, you can’t borrow more than $800,000. If your LTV is more than 80%, banks see that as too risky. They might still lend you money to refinance, but it’ll be at a much higher rate than you’d like.
Even though housing values have been increasing for over a year in many parts of the US, they’re still 10-20% lower than their peak. In the example above, if your house value falls 20%, your LTV rises to 100% because your mortgage equals the value of your house. So, how can you take advantage of these incredibly low interest rates?
If you love your home and plan to stay there for a long time, you might want to pay down your mortgage to get your LTV to 80% or lower. Here’s an example I adapted from a Wall Street Journal article that shows the trend of putting more cash into your home:
Let’s say your home was worth $1,100,000 a few years ago, but now it’s worth $910,000. Your current loan balance is $809,000 (on a 30-year fixed mortgage at 6%). Your LTV is 89%, which is too high. Your current monthly payment is $6,398. If you pay $80,000 at closing to retire your current loan, your new loan terms would be $729,000 on a 15-year fixed mortgage at 4.375%. Your updated LTV would be 80%, which is acceptable. Your new monthly payment would be $5,530, saving you $868 per month. The return on your $80,000 investment would be 10.4% annually for five years.
I don’t know about you, but I’d jump at an investment that guarantees a 10.4% return every year. That’s the kind of return Bernie Madoff promised, and he built a $50 billion empire! So, the key question is whether you want to stay in your house for 10+ more years and whether you have the cash on hand to pay down your mortgage and refinance.
The fact that more people are putting more cash into their homes tells me that people are being more conservative with their money. They’re looking for sure things. If you’re tying up tens of thousands or more dollars in an asset you can’t quickly turn into cash, you’re also showing that you’re more confident about your financial future.
It’s a shame that not everyone who owns a home can take advantage of the current low rates without having to put in more cash. But, if you’re determined to take advantage of the current low rate environment in the US, and plan to stay in your house indefinitely, then it makes sense to pay down that mortgage and increase your disposable income. Your budget will thank you in the long run, and so will America!
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