refinance

Mortgage offer looks too low to be true

Don TaylorDear Dr. Don,
There are 27 years left on my $417,000 mortgage carrying an interest rate of more than 4 percent. I recently opened an account with a free credit monitoring website. It recommends that I refinance the remainder of my home loan at 3 percent for 30 years.

Would it be a wise decision to refinance into another 30-year loan? I plan to stay in this house for up to 8 more years. After that, I'd like to sell the house and purchase an even larger home.

Thanks,
-- Bob Bungalow

Dear Bob,
When someone is offered a rate that's well below market, it raises a red flag. Bankrate's survey finds the national average for a 30-year fixed-rate loan is around 4.5 percent.

So, can a reputable lender offer 3 percent? Possibly, but let's discuss the possibilities. One explanation: You could be paying discount points or prepaid interest. Discount points can make sense, especially if you plan to be in the house for a long time. It also drives up the effective annual percentage rate, or APR, especially if you sell or refinance early on in the loan. The loan being offered could also be an adjustable-rate loan or a 5/1 ARM.

Even if you have perfect credit, there's likely a hook somewhere. You need to learn if there is, and what.

If you're planning to move, maybe you do so now. If your house is rising in value, odds are that the bigger house is also. How would you make up the difference in cost? There's also uncertainty about future mortgage interest rates. They'll likely be higher.

As for your question: If you can borrow $400,000 at 3 percent and closing costs aren't excessive, I'd say do it. You'd save close to $4,500 in pretax dollars just on interest expense for the first year after refinancing. You can check out a Bankrate refinancing calculator to get details.

Featured Rates

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of Dr. Don, go to the "Ask the Experts" page and select one of these topics: "Financing a home," "Saving & Investing" or "Money." Read more Dr. Don columns for additional personal finance advice.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

Show Bankrate's community sharing policy
          Connect with us
advertisement
HOME EQUITY STRATEGIES & ADVICE NEWSLETTER

Advice for homeowners looking for options to use their home’s equity wisely. Delivered monthly.

advertisement
Partner Center
advertisement

Connect with us