Lower Home Mortgage Refinance - Save $300 Monthly

After our last batch of credit card applications were approved near end of 2014, I noticed that stronger US dollar and economy have been keeping loan mortgage rate low.  My home mortgage rate as of December 2014 was a 3.875% - 30 years fixed conforming loan.  Should I go through all the paper work, receive a credit hit and refinance because the interest rate dropped to 3.700%?  Is it worth the effort?

- Loan amount $405,000, less than the conforming loan limit of $417,000
- Downpayment for the house has been over 25%
- 30-years fixed loan at 3.875% is considered safe and sound.

There is one major restriction.

1. For no-closing-cost refinance ($0 out of pocket money), there is a mandatory waiting period, typically 5-6 months after close of escrow, before I can apply refinance again without paying penalty.  If I apply for refinance before the waiting period expires, I would have to pay my bank/lender back the closing cost credit.

I composed the following guidelines regarding our home refinance.

• Why refinance  
• If at least net $100 can be saved per month from mortgage payment, then it is effortless to be guaranteed to save $1200 per year.  Keep this rate for at least 5-7 years. Guaranteed  effortless $6000 to $8400 after-tax savings is much simpler than earning credit card sign-up bonuses.
• Based on the chart, a major stock crash is inevitable within the next 7 years, then interest rate would fall to lowest level again to boost the economy.  If stock market will not crash in the next 7 years, my home mortgage loan will drop naturally to $300k from $400k



S&P 500 historical chart

• We do not plan to live in this house for 30 years.  Why would we need a 30-years fixed loan?  (I have on average refinanced every 18 months) A 7-years fixed loan is safe. 5-years fixed ARM carries higher risk with only slightly lower interest rate.
• The 7/1 fixed ARM loan rate was 3.0% in Q4 2014, 0.875% lower than our 3.875% 30-years loan rate.

• Understand interest rate impact
• Lower interest rate not only leads to lower monthly interest payment, but also higher mortgage principal payment.  The following chart confirms 7-years fixed ARM is a good deal.  I will be paying less net interest $196.87 and $98.35 more principal to save total $295.22 per month, or $3600 after-tax savings per year, while monthly mortgage payment is only $198 lower!  That is because of drop of 0.875% interest rate.



Real Mortgage Interest Rate Effects

• When refinance
• Mortgage rate changes daily.  Should we wait longer? (It turned out January 2015 rate has dropped to 2.75% for 7-years fixed ARM for a couple days).  We decided (incorrectly) in mid-November 2014 that interest rate seemed to go higher rather than lower in early 2015, so we applied for refinance in late November for 3.0% 7-years fixed ARM with no closing-cost.
• Which lenders have the best rate
• Large bank - if you prefer a large bank for some reasons, my favorites are Bank of America which offers interest-only mortgage loan, and HSBC Premier which sometimes offers very competitive rates.  Chase and Wells Fargo bank's rates tend to be higher.  I forgot to check HSBC this time.  My HSBC Premier membership will help. HSBC Premier offers 2.652% for 7-years fixed ARM.  Call 866.503.4722 to ask about closing cost fee.  The HSBC page says $1,700, but it may vary with state.



HSBC Premier Rates for Conforming Loan Amount

• Non-bank Mortgage Lender - I have refinanced with Provident Funding three times via a mortgage broker in the past.  Their closing cost is neither cheap nor expensive.  Best to call them to ask for details and estimates.



Provident Funding offers great rates for < 70% LTV loan

• Credit Union - credit union typically offers reliably low, if not lowest, mortgage rates.  Qualifying to be a credit union customer is the first important step.  They typically do not cover closing cost, but their closing cost is low.  For example, I am a member of Star One Credit Union.  Their closing cost is only a flat fee of $1,200, regardless of the loan amount.  Therefore, when the loan amount is low such that broker commission can not cover the closing cost, then I would apply our refinance at Star One Credit Union.



Star One Credit Union flat closing cost fee of $1700 is another great option.

• Planning next refinance
• Because interest rate changes daily, and sometimes even hourly when there is special situation, I would like to be ready next time.  My current loan rate is 3.0% 7-years fixed ARM, paying gross payment $1707 monthly.  If 30-years fixed drops to 3.375%, or 7 years drops to 2.5% after August 2015, then I will refinance again.

Do you think mortgage rate will go lower in 2015?  

What do you think about interest-only loan?