Mortgage offer looks too low to be true


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Dear 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.

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— 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.

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