"Is the time right to pay fees to get
a lower interest rate?"
Preferred Financial’s objective of moving clients from their
current rate to a lower rate through a “no cost” refinance
has been a mainstay or our business. A lower rate with no points
and no fees generates benefits immediately; no waiting for years
to recover costs …..a true “no brainer”. This
is best illustrated in the attachment entitled “Refinance
Analysis” which shows the benefits of a half percent decrease
in interest rate…….(please refer to it at this time).
Unfortunately, the current Fannie Mae pricing models are punishing
interest rate rebates rendering aggressive “no cost”
loans nearly impossible to deliver. Will the necessary pricing return?
We don’t know, but what we do know is waiting could result
in a lost opportunity of a lifetime. That said and given the historically
low interest rates that have been “magically bestowed”
upon us, we need to advise our clients of refinancing options that
include paying fees to secure lower interest rates.
As you will see in the second attachment entitled “Interest
Rate / Monthly Payment Analysis…with fees” there are
advantages to paying fees in this environment……(please
refer to it at this time”). The chart provides information
on costs for a variety of interest rates from 4.50% to 5.625%; and,
the payback of costs relationship between a borrower’s current
monthly payment of $2,533.74 versus a proposed payment. The numbers
are very compelling at each interest rate. I say that mainly because
in nearly each case, the borrower will recover loan costs within
two years. The most difficult decision here is not whether to pay
costs or not, but rather what interest rate should be selected.
- Initially, to select an interest rate that is below 5.00%.
Why?
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- Because we have not seen interest rates in the 4’s
for as long as I can remember.
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- And, rational or not, I believe there is a psychological
benefit of having a 30 year fully amortized fixed rate mortgage
at 4.875% rather than 5.00%+.
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- Next, to decide on the specific rate in the 4’s.
Here, there are a couple of factors that come into play.
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- Does one interest rate that stands out as potentially
the best? In this example, it would be 4.75% since it has
the shortest payback period of the rates below 5.00%. But,
should you consider a lower rate or even the lowest rate?
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- Here, I do not have a strong opinion but the opinion I
do have is predicated on the likelihood of a further collapse
of our economy. While this is a scary thought, one we would
prefer not to consider, it nevertheless could happen. While
the likelihood is low, if it did occur, interest rates could
be driven well into the 3’s. My suggestion would be
to stay with 4.75% rather than say 4.50%. Primarily because
if the unlikely did occur in 12 months or so, you would
see a “payback” of over half of the cost of
$8,153; making net costs (original cost minus monthly savings)
at that moment being approximately $3,000. Whereas, if 4.50%
was selected, the comparable net costs would be approximately
$6,000. Again, I do not have a strong opinion here because
if a rate in the 3’s did materialize; a 30 year fixed
payment of less than $1,900 would eventually offset either
of those net costs.
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I would like to point out one more item. That would be the payback
if a borrower chose to pay the buy down fees/costs in cash rather
than adding them to the loan balance. Using our 4.75% example and
the associated costs, if a borrower chose this option, payback would
come in less than 18 months….5 months sooner.
Thanks for your attention and consideration. Remember, at Preferred
Financial……“we,listen, we educate, then we perform
like no one else in the industry.”
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