Should You Refinance If It Means Giving Up a 3% Mortgage Rate?

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Why refinance, and why now

Welcome to Mortgage Mom Radio. I'm Debbie Marcoux, the Mortgage Mom. The Federal Reserve is the big topic next Wednesday — they're making another announcement, and I'll be on right after to tell you what took place. Today, though, is about refinancing.

I'm excited about one thing first: today is the first day we've figured out how to simulcast to Instagram, so we're live on Facebook, YouTube and Instagram. I'm not sure yet whether I can see Instagram comments on my screen, so bear with us.

I have not talked about refinance in a very long time. Rates are higher than they were, a lot of people have very low rates on their homes and aren't interested, and we went through a big cycle of home equity lines instead. I've been talking purchase, purchase, purchase — because it really is a good market to be buying in — but I have to help my homeowners too. Two weeks ago a viewer asked whether this was a good time to refinance. I said yes, promised to come back to it, and ran out of time. So this entire show is that answer.

And I want to give the disclaimer up front, because I'm going to be reading numbers: every single person's scenario is different. Different balances, different debts, different rates on cards, mortgages and equity lines. I'm not guaranteeing you these rates or these savings. I'm giving you scenarios that may look enough like yours that it's worth picking up the phone.

What people are actually carrying

The other thing that pushed me toward this show is that we've taken quite a few refinance applications recently from homeowners in a pickle. So I went looking for data.

I couldn't find published 2023 numbers, but for 2022 the average household carried about $7,900 in credit card debt — nationally, not just California. The number that stopped me: one in five people had more than $20,000 in card debt. And that was 2022, before another year of inflation.

When clients call, we run what's called a blended rate calculator. You give us the balances, the interest rates and the minimum payments on everything you owe, and we calculate the overall rate you're actually paying across all of your debt combined. Personal loans have been averaging 12 to 15 percent across my desk.

Then I did something I'd never done: I pulled up my own credit card. Capital One, excellent credit, no lates, no bankruptcies, no collections, an account I've had roughly nine or ten years. If I carried a balance on that card, my rate was 29-point-something percent. Almost thirty percent. I about fell out of my chair.

So put that together. One in five people carrying over $20,000. Card rates in the high twenties. That's why the blended rates I've been running for clients keep landing where they land.

A viewer said she thought the average card rate was 24.99%. It varies — but mine, with excellent credit and no balance carried, is at thirty. They've moved a lot with this many hikes this fast, and people are shocked when they actually log in and look.

One more thing on that. The standard advice is to open a card with a 0% balance transfer and move the money. Fine — if you can qualify. But if your cards are maxed at their limits, your score has already dropped, purely on utilization, and that great introductory offer gets much harder to execute.

Scenario 1: built from averages

This first one isn't a client, it's a composite from real averages. One in five people had over $20,000 in cards as of 2022, so I used $25,000 assuming it's grown. The average equity line we've written over the last year and a half was $150,000. And the average loan balance for a homeowner in Los Angeles County was about $571,000, so I used a $500,000 first mortgage at 3.75% — a really good rate on a decent-sized balance.

On the equity line I was deliberately conservative. Most of the lines we've written were around 10%, some as high as 12%. I looked up the national average for a brand-new HELOC today — credit unions, big banks, the cheapest I could find — and it was 8.5%. What we actually see, based on credit score and combined loan-to-value, is normally 10 to 12. And I used 29% on the cards.

Total monthly for that household — the $500,000 mortgage payment, the equity line, and the minimum card payment — is $3,995, not including taxes and insurance, which don't go away. Consolidate all of it into one new refinance at 7% and the payment is $3,196.

Call it $4,000 down to $3,200. You're saving eight hundred dollars a month by moving from 3.75% to 7%. When things are tight, $800 a month is the utilities. It's the kids' activities you didn't know how you were going to pay for.

Scenario 2: the COVID loan modification

This one is a real file in our system right now. The client owes $118,000 on their first mortgage, also at 3.75%. They have a personal loan for $22,875, a second personal loan for $19,500, and $31,200 in credit card debt. Taking the minimum payments straight off their credit report, their total monthly outflow today is $3,101.

Here's what makes this one worth hearing. During COVID, mortgage companies offered forbearance — some just sent a letter, some made you call. When you started paying again, many of them sent a loan modification to sign, and a lot of you now have a second loan sitting behind your mortgage. This client owes another $12,500 from that modification. They're not making a payment on it, so it isn't in the $3,101.

We're consolidating everything: the $118,000, the $22,875, the $19,500, the $31,200, and the $12,500 modification balance — and they want $41,000 cash in hand for improvements. So the balance goes up significantly, and the rate goes from 3.75% to 7.125%. Their new payment is $1,913 a month instead of $3,101.

They save almost $1,100 a month, take $41,000 in cash, and the modification second is gone. And when we ran their blended rate off the actual statements — even with that 3.75% first — they were paying 9.69% across everything. Walking away from 3.75% felt impossible to them. They're going to 7.125%, and it is a much better position.

Scenario 3: cards and a student loan

Another live file. Current mortgage $500,000 — that number keeps coming up in Southern California — at 5.625%. She owes $23,568 on credit cards and has a $33,000 student loan. Her total monthly across all three is $5,015.

Her blended rate, even with that large balance at 5.625%, is 7.49%, because the cards are so high and the student loan isn't cheap either. We're consolidating all three. The new rate we have her locked at is 7%, and her new payment is $4,140 instead of $5,015 — about $900 a month.

And yes, seven percent isn't fun. It's a number you think is ugly. I got into this business in '94 and into mortgage in '01 — seven percent, eight percent, eight and three quarters, I know you've heard it and I know you don't care. But rates will come back down, and this same person gets to refinance again when they do. Whatever we drop that payment to then, she's saving even more.

Scenario 4: seller financing coming due

The last one I like because it isn't a savings story. This client's current mortgage is owner-carried — the seller financed the purchase — at 5.5%, with a balance of $237,000. But the seller only agreed to carry it for a couple of years and wants to be paid off. They also have an $80,000 equity line at 11.5% that they used to remodel the kitchen. Their total out of pocket today is $2,113 a month, and their blended rate is 7.01%.

The new refinance is quoted at 7.125% — barely above their blended rate — and the new payment is $2,136. They're going up about $23 a month. Basically apples to apples. What they get: the seller gets paid off, which they have no choice about, and the equity line is no longer adjustable. So when the Fed meets next week and raises again, and again after that, their payment doesn't move.

Q&A: what credit score do you need?

Nicholas asks what a good credit score is for a refinance like this.

There are many programs, not one. We can refinance with FHA, VA, conventional through Fannie Mae or Freddie Mac, or jumbo financing. It depends on what you owe, your credit score, how much debt you're paying off, and what your home is worth. Are you a veteran with entitlement? Because if you have a VA loan available to you and you're in debt, you should be dialing our number — those rates are excellent and the cash-out goes to a high loan-to-value. VA guidelines allow up to 100% financing; there just aren't many lenders that will write it that high, so about 90% of value is the average we see. On a million-dollar home, that's a $900,000 cash-out if you qualify.

We have programs where the score can be as low as 580, and we have much better programs and pricing when you have a lot of equity and a high score. But there's no way to know what your savings would be without calling.

Student loans are about to restart

A reminder, and I know it's mom scolding. Student loans have been in deferment for almost three years. Those payments are coming due, and if you haven't budgeted for them because you're not used to making them, buckle down and start working them into your monthly cash flow now. They can also go into a consolidation.

Q&A: what about a recast?

Michael asks whether a mortgage recast is a helpful tool to get a lower monthly payment.

A lot of people don't know what a recast is, and some lenders don't allow it — my understanding is VA and FHA loans generally aren't eligible. Say you have a $500,000 balance and you come into an extra $100,000. You call the toll-free number on your mortgage statement, get servicing on the line, and ask: can I make a one-time principal balance reduction, and will you recast the loan — recalculate my payment on the lower balance? Some loans allow it, others don't.

Obviously, if someone had an extra $100,000 sitting in an account, they wouldn't be listening to a show about refinancing out of debt. So a recast doesn't help on the debt side. But if you have cash in the bank, you want a lower payment, and you don't want to lose the low rate you have — it's absolutely worth the phone call. Those are the words to use.

Why homeowners have been ignored

We've talked a lot about purchasing, about second homes, about investments, and almost nothing about refinance — partly because for a long time people didn't want to hear it. You get blinders on: I have a low rate, I'm not touching it, end of conversation.

But we're at a point where one in five people carry over $20,000 in card debt, and that includes homeowners. And the amount of equity homeowners have right now is unprecedented — values really did go up through the pandemic years. If you bought in 2019, 2020 or 2021, you have equity, and you may be able to leverage it, if you can get past being stubborn about a number written on your mortgage statement.

Whatever you decide, we're going to show you the math and you're going to make the decision. If the best plan is to do absolutely nothing, that's the answer we'll give you. I won't have anyone on my team who works any other way.

Wrap-up

When you call, have your statements ready — mortgage, credit cards, equity line, student loans, car, anything you might want to consolidate. That lets us run the blended rate, put the numbers together and email them to you so you and whoever else makes decisions with you can look at them properly.

If you want to know when I go live, text the word MOM to 844-935-3634 — that's 844-WE-LEND-4. Just the word MOM; you'll get one link a week, no spam. That's also the office number. Or head to mortgagemomradio.com — don't forget the “radio” — where you can book a free phone consultation, use the calculators, and email me directly. Those emails come to me. I'll be back next Wednesday. Talk to you all real soon.