As Rates Plummet, Wealthy Indulge in 'Serial Refinancing'
Many homeowners have been taking advantage of a steady drop in interest rates to refinance their mortgages. Some are doing so once, twice or more.
By refinancing, borrowers can often reduce their monthly payments or the length of a loan; sometimes they can do both.
But these repeat refinancers need to be aware of the downside, which in some cases may include a larger loan balance every time the rate is lowered, or additional hefty taxes and fees.
“We’ve seen people take a couple of shots” of mortgage refinancing in quick succession, said Bob Walters, the chief economist at Quicken Loans. “They can keep their payment the same and lower the term.”
Mr. Walters says that while some borrowers refinance twice or more because of a life event like a divorce, or because they see the advantage of trading an adjustable-rate mortgage for a fixed-rate one, most people simply want to lower the monthly payments or retire a mortgage early.
High-net-worth borrowers with so-called jumbo mortgages, or loans over $625,500, “are famous for serial refinancing,” said Keith Gumbinger, a vice president of HSH.com, a financial publisher in Pompton Plains, N.J. A rate drop of even a quarter of a percentage point, he said, could have a substantial effect.
Mr. Gumbinger provided as an example a couple who took out a 30-year fixed-rate loan of $750,000 at 7.36 percent in 2007. Their monthly payment (minus property taxes and homeowners’ insurance) would have amounted to $5,172.
If they refinanced in August 2010, to obtain a 5.29 percent fixed 30-year mortgage, their monthly payment would have been cut to $4,033.
A second refinance this month would take the rate to 4.29 percent and knock another $550 off their monthly payment. The savings, if they stayed in their home the full 30 years, could total $349,600, minus any costs and fees for refinancing, according to Mr. Gumbinger.
Numbers for repeat refinancers are difficult to come by, but Mr. Gumbinger, who has followed the home-mortgage market for more than three decades, says he has observed a surge in refinancing in seven-year cycles, often after a period of high rates.
He noted, for example, a spike in refinancing from 1993 to 1994 with the introduction of the hybrid ARM, then again briefly in 1998 and in 2003 when rates dropped substantially. This time around the trend has been more muted, because rates have not been as high as in recent years, and because mortgages are not as easy to obtain.
But an expansion of the federal Home Affordable Refinance Program, or HARP, which also loosens qualifications, could further spur refinancing. HARP was created to ease refinancing and achieve less onerous terms for homeowners whose mortgages are owned or guaranteed by Fannie and Freddie and made before May 31, 2009.
In addition to increasing their overall loan balance and having to pay closing costs, refinancers may incur fees and taxes that can add up to thousands of dollars.
In fact one of those expenses, mortgage-recording taxes, could put the brakes on some refinancing in New York State. “The mortgage tax makes doing this very expensive,” said Michael McHugh, the president of Continental Home Loan in Melville, N.Y., and the president of Empire Mortgage Bankers Association.
To avoid paying these taxes, New Yorkers may need to obtain a Consolidation Extension or Modification Agreement, or CEMA, to assign their old mortgage to a new lender. But even if you stay with the same lender, Mr. McHugh said, the best way to avoid mortgage taxes is to get a CEMA.
Some lenders, like Continental, will give repeat customers a discount on fees or title charges, he added. And on some Federal Housing Administration mortgages, lenders will waive or pay all the closing costs.