To me there is a ‘Golden Rule’ when it comes first considering a refinance… Provided there is no cost to do the refinance the there is NEVER a time when it is better to pay someone (a bank/lender) MORE for the use of their money than less.  If this was not the case then people would be refinancing every time interest rates went UP and that does not happen!

The most common argument I hear about not wanting to refinance is that  it ‘resets’ the loan back to 30 years, or whatever, but this has nothing to do with the financial calculation in whether to refinance or not.

If someone has 23 years remaining on their 30 year loan they can refinance to a lower rate also on a 23 year schedule, and save money each month.  OR, they can refinance, continue to pay the same amount each month as they are currently doing and end up paying their loan off after maybe 19 years instead of the schedule remaining 23 years.  OR, they can refinance on a 30 year loan, drastically reduce their monthly payment and use the savings to pay-off bills or invest elsewhere.

In almost 40 years of owning Sterling Financial I have yet to have one Financial Advisor or CPA prove to me that it’s better to stay with the higher rate than refinance (based on it being No Cost).  Most tell their clients to go ahead with the refinance. 

Now, regards to paying cost or not comes down to an analysis of the benefits of doing so and the ‘break-even’ points.

There are at least two situations where it might warrant refinancing to a higher rate, even though it sounds counter-intuitive.

1) You have a low rate only on an Adjustable Rate Mortgage (ARM) and you are fearful that the rate will eventually increase and your monthly payments will jump too high.  In this situation, it is not always possible to refinance to a fixed product at the same or lower rate than you currently are enjoying, so it can be necessary to take a slight hit in the rate in order to secure the long-term comfort of a fixed rate and payment.

2) You have a significant amount of instalment or credit card debt, which are at high interest rates and have monthly payments which are putting your finances under stress every month.  Or, you have home improvements you need to finance.  Under these sets of circumstances, it makes perfect sense to refinance even if it means the rate will not be quite as good as the ones you currently have.  There is little point in hanging on to a low rate if it is preventing you from living comfortably each month or in having the home of your dreams.

The principal stated in the first FAQ applies here too and as long as there is little to no cost then it will be worth it.  Also, what happens if you end up NOT selling your home after all, then you may have missed out on super low rates.

There is one caveat to this though, and that is if you think you may sell in 6 – 9 months.  Apart from the fact that going through the process may not be worth the savings achieved in such a short period, the lender too can take a dim view of it, and will often penalize a broker with an Early Pay Off charge.  I have had a couple of these and it is not fun!

In the 80s Sterling Financial pioneered the first ‘No Cost’ loans in the Country and this has now become the default loan to go to when first looking at a refinance.

At this stage it is important to know what a ‘No Cost’ loan is so that you are not deceived into thinking you have one when you haven’t.  Unfortunately, many Brokers and Lenders will tell you that their loan is no cost because you do not need to bring in any money to close BUT all they are doing is wrapping the cost into the loan amount.  This is NOT a ‘No Cost’ loan.

A ‘No Cost’ loan means that ALL the fees involved in obtaining the loan are NOT paid for by the borrower at all.  Costs such as Escrow, title, notary, appraisal etc.do not disappear but are instead paid for by the lender usually by a credit in escrow.  Sometimes the credit is greater than the costs add up to and at this point you are effectively being ’paid’ to do the loan!

Bear in mind, getting a NCL doesn’t mean the lender is going to pay everything for you and you will still be responsible for any impounds need, property taxes and insurance to be paid as well as daily interest charges due to the old and new lender – basically the items you would be paying for even if you didn’t refinance.

Once, the options for the No Cost loan have been established then at that point it is worth looking at perhaps paying the costs and/or discount points in order to get an even lower rate. A break-even analysis (how soon do I recover the cost of buying down the rate) is needed at this point.

Gone are the days when rates could be quoted based on a sheer minimum of information loan size and house value) and the quote would be good for a few days or even weeks. Nowadays rates are priced in real time

[When I first formed Sterling Financial, we would get rate sheets from the lenders in the mail every one to two weeks but now price changes pop up in our email in-boxes sometime several times a day!]

What is also different is the number of factors which can affect a price quote… amongst these credit score, amount of equity, occupancy, type of property, if a condo is it attached or detached, any cash out, purpose of cash out etc., etc.   I like to tell clients that if they call someone and ask what the rate is and that get an immediate quote then they should hang up and run far away!  To get a meaningful quote a small conversation is needed to go over the type of items listed.  Only then can a borrow feel comfortable with the accuracy of their quote.

There is no really good answer to this other than if you are shopping around to make sure you are asked for all the details outlined in FAQ above AND to make sure you are getting prices the same day and as close to the same period of time as each other.    The rate market can be very volatile and as mentioned previously it is possible to get several rate changes during the course of a day – some for better sometimes for worse.

TV and Radio ads often pound the airways with remarkably sounding low rates BUT rarely mentions the huge amount of points being paid to get these rates and come with the nice disclaimer at the end (“rates are based on x,y,z and are subject to change at any time”)

So how do you know you are getting the best rate?  Go with someone you trust or you have been referred to.  Someone you know has been around a long time and has a reputation to protect and be proud of.

I formed Sterling Financial in 1983 and it is the longest, continually running Mortgage Brokerage Company still in existence in the United State.  We must be doing something right.

On a personal note, because of the volatility I prefer NOT to quote too precisely and tend to my clients a range that they can expect to be in.  The goal being that when ready to lock, we attempt to time it to get the lowest of that range if possible.