Mortgage Refinance Journal

Refinancing your mortgage has many benefits, including:

• Lowering your monthly mortgage payment
• Taking out a 10 or 20 year loan when you have a 30 year mortgage lowers the time until pay-off
• refinancing with cash out can consolidate your debt into a lower interest and tax deductible option
• Related to the above, many people refinance to take out money for a large home improvement, or another large expense like college.

If you are refinancing your mortgage for one of the first two bullets above, then you are likely making the correct decision – depending on terms and closing costs.  However, if one of the last two bullets is actually your goal and the reason you are pursuing a refinance, you may want to consider a second mortgage instead, providing you have enough equity in your home.

The reason why a second mortgage might be the right decision for those last two options has to do with current rates and closing costs.  If you already have a favorable mortgage rate on your first mortgage, and rates are higher now, taking out a second mortgage may be a better idea than refinancing.  Or, in some cases second mortgages have far fewer and lower closing costs, which may be a factor in your decision.

Most everything we own can be valued at a certain price.  If you want to sell your microwave, you can probably easily find out how much to sell it for.  The same goes for your car, your old fitness equipment, and your used textbooks.  The price for these items will not change much over the next month or 90 days or even longer.  Logic would say the same would hold true of your home – its an object so it should be worth whatever its worth, no strings attached.

Unfortunately, valuing your home is just not that simple.  Most home buyers will need to take out a mortgage to buy your home, the what they can afford to pay is often more tied into how much they will pay each month or each year than what the listed price is.  In other words, many home buyers have to think about what the mortgage payment will be, not just what the sales price is.  And thus the whole pricing game can be tied to mortgage rates.  So, for example, if someone can afford a $2,500 mortgage payment (I did not do the math – but this gives the idea) they may be able to pay $450,000 for your home when rates are 5%, but if rates are 7% they may only be able to pay $400,000. to have that same payment.  When rates are low you may be able to ask for more for your house than when rates are high.  Some may dispute this, but for many buyers it is quite true.

Therefore, it may be that when interest rates are low, asking prices for houses are higher…but there is one caveat: Sometimes interest rates are low because the economy is sluggish.  And if the economy is sluggish people cannot afford as much for houses and therefore home prices will be depressed.  The opposite is also true, that sometimes when the economy is strong interest rates are a little higher and people can afford a bit more.

Long story short: the relationship between interest rates and home prices is complicated, and the only way to pirce your home is through recent comps.

Many of us have seen news stories or found web sites where “national averages” of mortgage rates were published.  Often we see a rate that prompts us to call around to various brokers or banks to because our current mortgage rate is higher.  Be careful!  National averages don’t always come with disclaimers regarding whether points or closing costs are built in to the comparisons.  As an honest broker once told me, “I can get you a 4% rate if you don’t care how many points or closing costs I add in”.   When you see a low national average mortgage rate, take it with a grain of salt and look up actual mortgage rates – and terms – from a few reputable mortgage banks to see what the reality really is.

One intersting way to see this clearly is to go to a site that has brokers present both rates and costs in realt time at the same time.  Zillow for example has a section where mortgage brokers can do this – there is no guarantee that you can get the exact terms and rate they produce, but their reputation is at stake so usually they will not exaggerate.  Sometimes you will see a great rate and great terms proposed, but other times you will clearly see that the lowest rates often come with points or high broker fees, etc.

National mortagage rate averages are a good place to start – they might signal when it is time to call around locally.  However, do not get too excited until you get actual quotes from reputable banks or brokers near you.