Fort Worth Real Estate Online


When Refinancing... Is Getting the Lowest Rate Always the Best Option ?

There have been times when I have gone on a listing, and while chatting with the sellers about the in's and out's of marketing their home, sometimes they get around to telling me that they recently refinanced.

My first reaction is usually to "cringe!" 

Now why would I do that ?  Well... most of the time they tell me that they were able to lower their payment by several hundred dollars because of the refinance.  It is then that I ask them the question that usually tells the tale...

Gee, Mr and Mrs Seller... what was your loan amount before you refinance ?  Oh... $235,000.  Ok... and did you have to pay any "closing costs" when you refinanced ?" 

Oh no... we refinanced with "no cash out of pocket."  Our loan officer told us we could roll the closing costs into the mortgage... so "it didn't cost us a thing !"

My next question is always... "So, how much were the closing costs ?  How much did you 'roll in' to the new loan ?

"Well... the closing costs came to about three percent of the loan amount, and then we paid two more 'points' to get an even lower rate.  So... our total closing costs were about $13,000.  But, that was ok... we rolled it into the new loan.

Of course, I asked them what the new loan amount was.  They said... oh...  it comes to $248,000 all together, but our monthly payment is still over $200 a month lower than it was before.

It was my hurtful task to gently tell them that they just pretty much wasted that Thirteen Thousand Dollars.

First of all... I never recommend refinancing unless the "spread" between the previous rate, and the new rate is more than 2 percent.  This way, instead of rolling in the closing costs, the lender can "buy up" the rate rather than "buy it down".  Doing that creates a "credit" which can usually pay for most of, if not all of the closing costs for the new loan.

Recapping... here are the two choices... 1)  Roll in closing costs and extra points so that the rate is the lowest and the out-of pocket is zero... or 2)  pay no points, and perhaps "buy up" the rate by a 1/4 to 1/2 %... which creates a credit which takes care of the closing costs.  The second way leaves the seller with exactly the same mortgage amount as before, and also with a lower monthly payment... just not quite as low as with the first method.

In doing that... if things change, and the owner suddenly has a need to sell... he or she has not painted themselves into a "money corner" they cannot get out of.

As is usually the case... the best thing for the seller to do when contemplating refinancing depends on their individual situation.  Sometimes it makes sense to roll in costs and points, but most of the time it's not the best alternative.

Comment balloon 12 commentsKaren Anne Stone • February 07 2008 01:07AM


Great post, Karen.  People get sucked into slick ad campaigns and the lure of a lower payment and never really learn the true cost of that savings.  $13,000 cost for a $200 return.  Hmmm.  No thanks.  Hopefully it's a lesson they will only have to be taught once. 
Posted by Jesse & Kathy Clifton, Retired (Jesse Clifton & Associates, REALTORS®) almost 13 years ago
Jesse:  The tragedy here is that these poor folks were refinancing to get themselves in a better position, but actually dug themselves further into a hole.  Depending on how tight their local market is, they just might have made it impossible for them to sell their home when it comes time.  I feel badly for them.  Thanks for your kind comments.  Take care...
Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) almost 13 years ago

Karen Anne - from your lips to God's ear!  People either don't want to "get it" or they are being duped so badly they don't want to admit that either.

I have found that generally people get overwhelmed with all the 'options' available to them in a re-fi and tend to only see that lower monthly payment.  Then they make a huge decision based on emotion, not math.  It's a bad combination. 

Posted by Carol Smith (Casmi Photography) almost 13 years ago

Good Morning Carol:  It is easy to get overwhelmed when talking with "some" loan officers.  This seller of mine was definitely duped.  One of the things I make sure I tell my buyers at closing is that if they ever consider refinancing, they should definitely call me, and I will advise them.  The result of this one buyer not calling me cost them $12,000.  I was heartsick, but... they didn't call... so I could not advise them.

These kinds of situations make me all the more amazed that some brokers try and prohibit their agents from talking financing with their buyers.  I guess they are afraid of some sort of liability, which from the owner/broker's point of view... I can understand.  But... the buyer is abandoned... being forced to go it alone.  Not a good plan.  Carol, thanks for commenting.  Take care...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) almost 13 years ago
Karen Anne - Congratulations on knowing so much about how mortgages work!  It's unfortunate that more lenders are not asking the RIGHT QUESTIONS to find out what the true long term (not just immediate) goals are for the homeowner. Great post!
Posted by Eleanor Thorne, Equity Resources 919-649-5058 (Equity Resources) almost 13 years ago

Hi Eleanor:  I think it is very important that I can explain mortgage financing to my buyers and sellers.  Having that ability also increases my overall credbility... which really helps when it's time for contract negotiations.  Thanks for your kind comments...

By the way, Eleanor, after reading your comment above, I went and looked at both your profile and your blog, and liked what I saw.  So... I added you as an Associate, and subscribed to your blog.  I look forward to reading your posts.  Take care...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) almost 13 years ago
OH MAN....SOOOO many people get caught in that.  I don't understand why they think that $13,000 is "free" - it kind of boggles the mind, but we must all bear in mind that not everyone is a business person or an expert in mortgages.  It is still the responsibility of the lender to explain how they are paying for those costs and what the true cost over time is.
Posted by Ruthmarie Hicks (Keller Williams NY Realty - 120 Bloomingdale Road #101, White Plains NY 10605) almost 13 years ago

Hi Ruthmarie:  Yes... soooo many people get caught up in the old "you won't have to pay any closing costs on your refinance" lie !  No, not everyone is a business person or an expert in mortgage.  All these sellers are doing is simply believing someone they expected to be "believable."

Yes, it is the lender's responsibility to explain everything... but not all of them do... or at least they don't do it well enough.  And also... most sellers hear what they want to hear.  That is why I try my absolute best to encourage my sellers at closing to call me when thinking about refinancing.  I is so critical.  Thanks for commenting, Ruthmarie.  Take care...

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) almost 13 years ago


Good job dude, nice post! HA

Karen, you are killing me today with laughter. Your comment on my blog and this post. Thanks for making me laugh. I do aree with your larger point, I hate it when someone does like 50 posts of about 4 sentences each and then thos good dude comments.

Have a great weekend.

Posted by Alan Kirkpatrick, Alan in Austin (Austin Texas Homes) almost 13 years ago

Alan:  That's "dude-ette" if you don't mind.  I am glad you enjoy my attempts at humor.  That was a very necessary talent for me to have back in my nine years of junior high school teaching days.

The "outside bloggers" say that... if you are going to have an outside blog, you should post once a day... or at least once every other day... to keep the interest of your readers.  I guess that makes sense... but it is not easy producing quality material that often.

Back to refinancing... back in my teaching days, I also taught math.  And... I have taken the H&R Block tax course just to be conversant about taxes.  It builds credibility when chatting with clients.

Posted by Karen Anne Stone, Fort Worth Real Estate (New Home Hunters of Fort Worth and Tarrant County) almost 13 years ago
I do understand that not everyone is savvy when it comes to math. It is amazing to me that the "No Closing Cost" hook fools anyone. If your using the services of a loan officer, a lender, a title agent, and having documents recorded in the public records someone is paying all of these people and that someone is the borrower. Just the term borrower implies that they are in fact borrowing money. While I would agree that refinancing is not for everyone, the big push now is to try to correct all these "broken ARMs" that people agreed to for whatever reason over the past few years. I am a loan officer and I explain line for line the costs associated with the loan by thoroughly going over the HUD1 settlement statement before closing. Karma will bite you in the assbehind and I am surprised that some of those who fell prey to the"No Closing Cost" hooks have no pursued legal action. I saw a commercial advertising this very thing a couple of nights ago from "America's largest home lender."
Posted by Rich Dansereau (Positive Real Estate Professionals) almost 13 years ago

Hi Karen Anne,

I'm not commenting on this blog but chose it because of fewer comments.  You are so good at teaching that I have another question.  How do the ones who have so many comments answer all those comments? Is there an easier way than scrolling back and forth and answering individually.  I don't know how the most popular bloggers ever have time to get any work done.  I had a blog with about 35 comments and I felt really rushed to respond.  Any tips?  Thanks.

Posted by Barbara S. Duncan, GRI, e-PRO, Executive Broker, Searcy AR (RE/MAX Advantage) almost 13 years ago