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Aug 19, 2024 Is now the time for Las Cruces homeowners to refinance their mortgage?

Gary Sandler

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Published 19 August 2024

The Federal National Mortgage Association (Fannie Mae) announced last week that mortgage refinance activity jumped by 32.8 percent week over week and 94.5 percent year over year. Is that an indication that now is the time for homebuyers who purchased when rates were higher should refinance their loans? According to Mark Palim, Fannie Mae deputy chief economist, “…. most borrowers would need mortgage rates to move much lower before they’re incentivized to refinance.”

The reason most borrowers may want to wait for rates to decline more before refinancing has everything to do with the cost of the refinance and the time required to recoup the investment. Take for example a borrower who obtained a $300,000 mortgage at high noon on October 26, 2023, the day the 30-year fixed rate mortgage reached its modern-day peak of 7.79 percent. Would refinancing at last week’s rate of 6.47 percent be prudent? A couple of simple math calculations will provide a clue to the answer.

A borrower currently paying on a $300,000 mortgage at 7.79 percent would have a monthly principal and interest (P&I) payment of $2,158. Refinancing at 6.47 percent would lower the P&I to $1,890; a difference of $268 per month. The second important consideration is the cost of the refinance. “Refinancing your mortgage costs anywhere between 2 to 5 percent of the amount of the new loan”, according to Bankrate.com. The difference between the high and low percentages will vary depending on the cost of the loan fees charged by the lender. Some local Las Cruces lending institutions charge as little as a few hundred dollars for their part of the process, while some online lenders and mortgage companies have been known to charge upwards of $2,000 to $3,000 for the same services.

For this example, let’s say the cost to refinance our $300,000 mortgage is 2.5 percent of the loan amount, or $7,500. Closing costs might include an application and/or origination fee, a credit report fee, discount points (to lower the rate), processing fees, appraisal fees, title insurance premiums, title company handling fees, prepaid interest and property taxes (to establish a new escrow account), a new homeowner’s insurance policy, and other ancillary fees. The key to determining how long it will take to recoup the $7,500 cost is to divide the cost of the refi by amount of the monthly P&I savings. In our example, $7,500 / $268 equals 27.9 months, or just under 2.5 years to reach the break-even point. Working with a lender whose fees are low or waiting until rates decline further will accelerate the arrival of the break-even point. Borrowers will then know if the break-even point is acceptable to them.

There are some barriers to refinancing, however. The most prevalent is the amount of equity in the home. Equity is the difference between what is owed on the home and the home’s value. First-time buyers who typically finance 94 percent of their purchases, according to the National Association of Realtors, may be prohibited from refinancing their conventional loan due to a lack of equity, as most conventional loan refinances require 20 percent equity. Borrowers with FHA and VA loans have a much easier time, as the equity requirements range from zero to 5 percent.

It is also important that our refinance shopper does his or her due diligence and shops carefully for the new loan. Not all shoe stores carry the same shoes, and not all lenders carry the same loans. And, even if two shoe stores happen to carry the same products, they may not offer them at the same price. The same holds true for lenders.

Finally, qualifying guidelines vary from institution-to-institution, so don’t take the word of just one lender. I’ve personally worked with borrowers who have been told by Lender “A” that they don’t qualify, only to be told by Lender “B” that they’re as good as gold.

See you at closing.

Gary Sandler is a full-time Realtor and president of Gary Sandler Inc., Realtors in Las Cruces, New Mexico. He loves to answer questions and can be reached at 575-642-2292 or Gary@GarySandler.com.

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