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Dean Spalding, a financial-services executive in Louisville, Ky., has refinanced his 15-year mortgage which now has a balance of roughly $350,000four times since 2009, including twice in the past 12 months. Over this period, his rate has dropped from 4.25% to 2.875%. After his last refi, he says, his monthly mortgage payment dropped by about $150.
“It has been a no-brainer,” says Spalding, who used First Commonwealth Mortgage, a mortgage broker based in Louisville.
The last time homeowners were so eager to refinance, it was a more expensive proposition. At the height of the housing boom, 86% of borrowers who refinanced took out cash and ended up with a higher loan amount, according to Freddie Mac.
To do so, they typically agreed to pay thousands of dollars in closing costs and often a steep prepayment penalty, a fee levied on those who paid off a substantial portion or all of a mortgage typically in less than four years.
Those costs made refinancing prudent only for those who could get a significantly better rate, often two percentage points or more, financial advisers said, and expected to stay in their houses long enough for the monthly savings to offset the upfront costs.
Today, lenders say, some borrowers are refinancing when rates drop as little as three-eighths of a percentage point.
“The traditional rules of refinancing are no longer in play,” says Bruce Thielen, a vice president at NASB Financial.
So what is the catch? In exchange for waiving closing costs, lenders charge a slightly higher interest rate.
The numbers vary by lender and type of mortgage, but in order for 1% to 1.75% of the loan amount to be applied toward closing costs, a lender typically raises the rate by 0.25 percentage point or more, says Mark Goldman, a senior loan officer at C2 Financial, a mortgage brokerage based in San Diego.
This trade-off entices homeowners to refinance, bringing much-needed business to lenders at a time when a still-sluggish housing market has hurt the market for new mortgages.