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Refinance Breakeven & 4.5% Fixed Mortgages

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The Treasury Department is working on a plan that would lower interest rates on 30-year fixed mortgages to 4.50% APY. They would do this by purchasing mortgage backed securities from Fannie Mae and Freddie Mac, thus increasing demand and forcing mortgage rates down. Regardless of what you feel about this plan, the thought of 4.50% APY mortgage interest rates should appeal to anyone who owns a house or wants to own a house in the next few years. 4.50% APY is an unheard of rate for a thirty-year fixed mortgage, taking advantage of it could leave you smiling for years when you look back at how you made lemonade out of all these economic lemons.

My advice for anyone who seeks to take advantage, start saving now. You’ll want to save up your war chest for either the refinancing closing costs or the home purchase closing costs. Either way, you want to be in a position to take advantage should this plan go through.

Refinancing Breakeven

My wife and I have lived in our home for three years and we absolutely love it. The current interest rate on our 30-year fixed mortgage is 5.75% APR, or around 5.9% APY. Should Treasury push rates down to 4.50% APY, it would seem like a no-brainer for us to refinance, assuming reasonable closing costs.

I entered in some data into’s Refinance Breakeven calculator (assuming only 1% for closing costs, which matches some quotes online) and the results were good. After eight months, the money saved on my lowered monthly payment would exceed the closing costs. After sixteen months, the money saved after payments and interest payments exceed closing costs and what would’ve been saved prepaying the mortgage. The sixteen months is the figure I’m most interested in because it takes into account how we went from a 27 year mortgage all the way to a 30 year mortgage. Seems great right?

Looking at the refinancing summary (after you click “View Report”), I see that I only save $4,680 in total interest across thirty years. That was surprising. Saving $5,000 over thirty years isn’t worth the hassle of refinancing, so I changed the loan terms to a 15-year fixed with the same interest rate. The sixteen months from before dropped to 15 months (not surprising because the payment amount goes up) but the total interest saved is over $100,000. The monthly payment goes up a little bit but it actually matches how much we pay currently, so we may consider refinancing to save that $100,000.

Several things worth mentioning:

  • This is just an estimate, I think that if you are serious about it then you should get some actual quotes with real closing cost figures. Is 1% too low? Is it a reflection of how an online quote is sometimes just a way to get you on the phone with an agent?
  • The Treasury plan only talks about 30-year fixed mortgages but I’d imagine 15-year fixed mortgages would drop too. Despite the calculations I made that confirmed a 15-year mortgage is the same as a 30-year mortgage with extra payments, having a 15 year on the books seems to “force” the prepayment, thus forcing the interest savings.
  • We may or may not be living in this house for the next fifteen or thirty years. However, we shouldn’t let the unknown make our decisions for us. I suspect we’ll know in the next few months whether we’d like to move and if we do, that will drive our refinancing decision should this plan drop interest rates to these great levels.

We’ll be waiting to see if this plan does lower rates and to see what our future plans are but sagging home prices and low interest rates make for a very appealing time to buy a home.

{ 12 comments, please add your thoughts now! }

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12 Responses to “Refinance Breakeven & 4.5% Fixed Mortgages”

  1. Glenn Lasher says:

    We’ve lived at our current address since 2003, and got a 6.00% rate on our 30-year mortgage with moderate credit. We didn’t spend a lot on our house (less than $100k). In the immediate year or two after buying, we had a lot of offers to refi, all of which we turned down, because not one of them could get us enough savings to cover the closing and setup costs on the new mortgage.

    On the other hand, as you say, 4.5% seems like a no-brainer. These other offers were more typically 5.75% or so.

    Back to the first hand, I’ve estimated that payoff is within reasonable reach if we were to put our nose to the grindstone. Of course, I would want to dispatch the higher-interest debts first. Best-case scenario would be completely debt-free in 6 years, which, of course, isn’t going to happen.

  2. Bill says:

    Unless I’m missing something, won’t the banks still require you have to 80% LTV ratio in order to refinance? I don’t see this plan helping the people who need it most – those that are under water on their mortgage. I agree that it is an incredible incentive for those who do not yet have homes, but it doesn’t apply to the rest of us that have already bought.

    • jim says:

      @Bill: That I don’t know, if that’s a requirement for refinancing then I imagine that will stick around. Also, I believe the 4.5% mortgage loan plan is an attempt to stabilize home prices and less to help people stay in there homes.

  3. CK says:

    The 4.5% is supposed to only be available to new loans not refis 🙁

    It’s supposed to stimulate people to enter the market or step up in house. I imagine refi rates will come down somewhat if new loans are originating at 4.5% though.

    Most banks will require a LTV of 80% or you’ll have to pay PMI.

  4. Steve says:

    I bought my first house in November 2007, with and interest rate of 6.625%. About 10 months later, I started receiving ‘junk mail’ informing me that I am eligible for an FHA streamline refinance (which reduces the amount needed for refinancing) from some companies I was not familiar with.

    One offer I received said that there were no closing costs, and I would get a 6.0% interest rate. I was very skeptical, but I decided to check them out. It turned out to be legit. The only costs were I had to cough up money for escrow at closing (but my current mortgage company would reimburse me my already paid escrow a month later), and about 300 dollars of interest were tacked onto the mortgage (to account for the mortgage transition). The company I used was Primary Residential Mortgage, Inc, which is a company that owns the mortgage for a very short time, before they sell it off to a larger bank (my mortgage is now with CitiMortgage).

    If mortgage rates drop to this historic low, it will be interesting to see if there are any more offers for a no closing cost, FHA streamline refinance.

    • jim says:

      @Steve: There definitely will be. Mortgage companies are like any other company, they go to where the money is regardless of where it is. Mortgage lenders used to make money on the front end with closing costs and the like, now they make it on the back end when they sell it to other companies.

  5. Steve: No-cost refis are always available. The most common ways that this works is that they either roll the costs into your mortgage such that you don’t have to bring any cash to the table, or they sell you negative points to cover the costs. This latter option is just the opposite of buying points to get a lower rate — you accept a somewhat higher than market rate in return for cash that is used to cover your closing costs.

  6. Brad says:

    You don’t have to wait to get a great rate now. I just locked on Friday with a local bank in Iowa City, IA at a refinance rate of 4.875, $1300 total closing costs, 0 points, 30-year fixed.

    The great rates are already here. Call your banks and credit unions and lock now. If your banks don’t offer less than 5%, call the ones in Iowa.

  7. Patrick says:

    I am going to wait and see as to whether they are still going to push the rates down for only new home buyers or people who own houses. I would get a refinance immediately if they did push it down to 4.5% though.

  8. Dave Woodson says:

    From what I understand so far this is only going to be for Purchases not Refi’s


  9. Miss M says:

    @ Bill there is some talk of Fannie and Freddie allowing no-appraisal or so called “streamlined” refi’s for loans they already hold. Since they already hold the loan regardless, keeping homeowners in the home and paying the mortgage is more important than the appraisal.

  10. Bobby Lambert says:

    I have checked two local banks concerning this low rate refi and both were looking for 20% down-payments. If this is what we are selling here friends, I need to come and live with you because paying $35,000 on the spot is not in my future. Is there something I am missing or do I just need to look harder?

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