With the uncertainty in the economy resulting from the pandemic, mortgage rates have continued to fall throughout 2020. Recent data shows that rates have notched new record lows on 12 separate occasions this year. That makes this the opportune time for homeowners to consider refinancing their mortgages.
In this episode of Fool Live that aired on Oct. 23, "The Wrap" host Jason Hall, Fool analyst Jason Moser, and Fool.com contributor Danny Vena discuss their own recent refinancing experiences and why homeowners should consider the move now.
Jason Hall: Danny wants to help make you smarter, and this is the kind of smarter that can make you richer by saving your money. Danny, let's talk about refinancing.
Danny Vena: I'm going to talk about my own personal situation, because I just started looking into this. I heard that interest rates for mortgages were down near historic lows, so I did a little bit of homework. What I found was that the interest rate that I had, which was historically low at the time that I got it, I was actually able to refinance and get 1.5% lower on a 30-year mortgage than what I previously had, which saved us about $500 a month on our mortgage payments.
Jason Hall: Danny, if you don't mind saying, what was your APR [annual percentage rate], your interest rate prior to refinancing?
Danny Vena: It was four and an eighth.
Jason Hall: Four and eighth, so 4.125%.
Jason Moser: It's exactly where we were too, Danny. We refinanced just like you.
Jason Hall: What you bring it down to?
Danny Vena: 2.875% for us.
Jason Hall: That's a 43% reduction in your interest rate, is that right? 40%? 30%?
Danny Vena: I didn't do the math. I just knew it was a lot. But the reason that I say this is because this is something that folks don't necessarily think about every day. I know I certainly didn't. But when we got looking at it, my first thought is, "Well, I'm going to have to bring a lot of cash to the table to make this happen." Not everybody has the resources to do that, but it turned out that I brought a lot of cash to the table and turned around and got the majority of it back once they closed our old escrow account and I didn't have to make a mortgage payment for a month, and then they gave me the refund of the closing costs that weren't used. It turns out that I'm going to recoup my closing costs in less than three months. For me, that was a no-brainer. Now, obviously, that's not going to be the same case for everybody. Not everybody has the resources to bring all the money that they need to the closing.
Alternatively, you can get a refinance where they roll most, if not all, of the closing costs into the mortgage. If the amount that you are saving on your interest rate is significant enough, that might make sense. But I encourage people, if it's not something that you think, get yourself smart on mortgage rates, get yourself smart on refinancing because you can turn around. I don't know about you, but $500 a month is a big chunk of change for me and my family.
Jason Hall: That's a rough IRA contribution for the full year. That's $6,000, you can put that right into a Roth. That's a lot of money over time. We were at 3.75% back in November when we bought our house. We refinanced quickly at 3%, and they gave us a bunch of credits. It was just insane. It was just insane.
Jason Moser: Yeah, we did the same thing. We were 4.125%. We just closed, I think probably two weeks ago, brought it down to 3.125%. The problem here in Virginia is housing valuations are still ridiculously high that virtually any loan is a jumbo loan.
Jason Hall: Jumbo, yeah.
Jason Moser: So that affects the interest rate to a degree, but we were able to save about $500 a month, a little bit more than $500 a month on the all-in payment. To your point there about the closing costs, we did roll all the closing costs into the loan. When we wanted to close, we didn't take any cash to the table, and we actually got like $1,800 back for refunds on closing items that weren't used, escrow refunds and whatnot. Yeah, you walk out of there feeling like, "How did I not do this sooner?" As a homeowner, you need to know that it exists, you need to know how easy it is to do. Frankly, you need to know how important it is right now to do it, because interest rates, they've never been this low.
Danny Vena: They will probably never be this low again.
Jason Moser: More than likely. More than likely.