There are millions of homeowners out there who have already refinanced their mortgages. Some are even considering refinancing for a second time. However, it may surprise you that there are still many borrowers out there who haven't refinanced. Here are five reasons why:
1. Small Loan Amount
With a small loan amount, it can be hard to achieve enough savings by refinancing to make the transaction worthwhile. For example, refinancing a $750,000 loan from 5.5% to 4.5% can yield a monthly savings of almost $460 per month, but the savings for a $75,000 loan only amount to about $46 per month. Also, lenders often tack on additional fees or interest rate premiums for small loan amounts, so it's more difficult for you to get a rock-bottom mortgage rate.
2. Short Time Frame
The relatively high costs of refinancing need to be recaptured though interest savings, which can take a while. If you have just a few years before you expect to move or even refinance again, you might never reach that savings point. While there are ways to refinance and save some money even if you have a short time frame (such as a "no-cost" refinance), the increase in interest rate by this method can seriously reduce the benefits.
3. Low Loan Amount
There's no doubt that having a high loan amount can produce a refinance windfall; it's also true that having a substantial change in your interest rate matters at least as much. Over the long run, it is possible to refinance with only a slight rate change and save money, but it's a painfully slow process. Given today's low mortgage rates, you can shoot for an interest rate difference of just 1 percent and still save substantially. However, for some borrowers, this doesn't seem to be enough of a gap, since there are still many, many loans in place today with rates below 6 percent which might be eligible to be refinanced but aren't for some reason. This is probably due to a combination of small interest rate differential, small loan amount, short time horizon or a lack of cash
4. Your ARM has a lower rate
Engineering by the Federal Reserve has driven down short-term interest rates to unprecedented lows. Since some of these short-term rates govern the interest rate changes on ARMs, many borrowers found a pleasant (and often substantial) decline in their interest cost when their ARM adjusted last year and this year. Some of those rates are in the upper 2 or lower 3 percent range. Even with record-low fixed rate mortgages available, refinancing to a fixed rate loan means giving up fantastic savings and getting a higher interest rate. This presents a bit of a quandary; refinancing to a fixed rate loan today can remove tomorrow's interest rate risk, but at a considerable cost. Although safety can be had at a terrific price, there is a compelling financial argument which can be made for holding onto that ARM at least for a while.
5. Inertia
Let's be honest: Getting a new mortgage in today's tight lending climate isn't going to be fun or easy. Your existing lender may not offer some form of an easy streamline refinance. If they don't, you'll need to shop the marketplace to find a great deal, then fill out an application, get all your financial documentation in a row (in many cases, multiple times), and spend a fair bit of time getting the transaction into place. It can be a time-consuming process which can make you feel like you're being put through the ringer. If the savings are small, it might feel too much like work to make a change to an existing mortgage.
About the Author
Shawn Kaplan is an active, multi-state Licensed loan officer with Access National Mortgage.
Email Shawn at skaplan@accessnational.com or call 615-426-3182.
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For help on this or other related items call us at 615-426-3182 or email Shawn Kaplan at skaplan@accessnational.com
