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Question from an Australian(ish) here. If you Americans buy a house with an 8% mortgage today, can you remortgage in the future if/when the rate drops. Is the

by d_t_w 3y ago

Question from an Australian(ish) here. If you Americans buy a house with an 8% mortgage today, can you remortgage in the future if/when the rate drops. Is the buy-out penalty of remortgaging somehow higher than just selling / repurchasing? Do people get locked into higher mortgage rates for long periods of time that are uncompetitive is my question. Is there a significant downside? Is 30-year fixed normal in the states? 30-year fixed rates don't exist in Australia. You'll get a 5 year fixed rate from ~6% or so, that's about it.

Cerium 3y ago
30 year fixed and 15 year fixed are very common. There is also 5 year fixed then variable, but those burnt a lot of people in 2008 so they have a bit of a bad reputation with some. There are generally no early payment penalties. Refinancing is easy and considered worthwhile whenever the rates improve by 0.5 percent or more.
nostromo 3y ago
Yes you can refinance at a lower rate if/when rates drop. You have to pay some money to do so, but it's insignificant compared to the cost of interest if it's over a percent lower or so. There are usually no pre-payment penalties. I imagine a lot of people buying houses right now are counting on mortgage rates dropping in the future.
- bushbaba 3y ago
  *so long as your house appraised for high enough value to meet the debt to equity ratio. So if mortgage rates go down, but your home price crashes 10%, you’ll likely only be able to refinance by significantly paying down the mortgage balance.
pxeboot 3y ago
If rates drop, you can refinance immediately, assuming your credit score/income are still sufficient enough to qualify for a new mortgage.
rpearl 3y ago
you can refinance when rates are lower. The question is when they will be.
- Daviey 3y ago
  And pay significant early termination fees.
  - lukevp 3y ago
    Mortgages in the us don’t typically have early prepayment penalties of any kind.
- frumper 3y ago
  Unless prices drop below your mortgage balance.
  - psunavy03 3y ago
    Prices are not likely to crash with the conditions we have in place currently. Prices crashed in 2008 because there was 10 to 15-year-long bipartisan push that "everyone needs to be a homeowner." This let banks write adjustable-rate loans to people who arguably never should have been touching a mortgage given their financial situation. And when interest rates reset, enough people started defaulting that the whole system collapsed. And that's without getting into the funny business of securitizing those bad mortgages and using them as investment vehicles. These days, mortgages are generally very well-underwritten and only given to people who can afford to pay. High interest rates are going to put a cap on prices, but where we're at now is a supply crunch. 2008 wiped out the homebuilding industry and now there's a supply crunch with not enough houses for the amount of people who want to buy, which is driving up prices.
forrestthewoods 3y ago
Yes, you can refinance to a lower rate. It’s easy and people do it all the time. There is some cost overhead so you don’t do it everytime rates drop a tiny bit. But if they drop more than 1% it’s easily worth it.
- tzs 3y ago
  > Yes, you can refinance to a lower rate. It’s easy and people do it all the time. It's almost unbelievable how easy it can be. I got a call from the company that held my mortgage asking why I hadn't responded to the refinance offer they had sent me. I told them I wasn't aware of any such offer. They said they had FedExed an offer to me a couple weeks earlier. I went and looked on the front porch, and sure enough there was a thick FedEx package there. I hadn't noticed that because I used the back door as my main entry/exit door. Inside was all the paperwork, prefilled, for a refinance with instructions that said all I had to do to accept was call them and tell them, and then they would send a notary to meet me at home or at my office with a copy of the documents for me to sign.
positr0n 3y ago
It's easy to refinance at a lower rate. You essentially just pay for and qualify for a new mortgage, the fact that it's a refinance and not a new house you're buying is mostly immaterial. So you're out a few grand in fees, and if you somehow become less creditworthy it may not work. When interest rates first spiked it seems like the prevailing wisdom was that they wouldn't stay high for long, so buyers should just swallow the higher monthly payment "for a year or two" then plan to refi. I don't hear that advice much anymore!
bhawks 3y ago
The American mortgage market is very unique from the perspective that it has 10, 15 and 30 year fixed rate debt. There are generally no prepayment penalties and no balloon payment (each payment is the same amount even the last one). You can pay down extra any time you want and it reduces your principal appropriately. The maturities and payment structures are quite generous compared to many other countries mortgage products. Of course there are shorter maturities and different types of adjustable rate mortgages but these are not popular (fallout from 2008 crisis and the general low interest rate environment). Edit: there is also 40 year fixed products starting to be offered.
- thinkerswell 3y ago
  What is the cause of it being do different from the rest of the world?
  - patd 3y ago
    We also have 20 to 30 years fixed rates in Belgium. It seems to be possible in France, Germany, The Netherlands, … So I’m not sure that the US is actually an exception.
    - afandian 3y ago
      A family member recently got a long term fixed low rate mortgage in Belgium and I’m curious about how different things are compared to the UK. UK mortgages are higher, shorter term. Is the Belgian bank losing money compared to the UK one? Is there state intervention?
      - patd 3y ago
        There is no state intervention. Depending on market conditions, a 30 years fixed can have a higher rate than 25 years. It’s basically hedged with long term bonds (Belgian or European) + a profit margin for the bank + risk based on your profile (age, health, employment history, …) I guess UK banks are just hedging with shorter term bonds compared to Belgian ones.
jsolson 3y ago
A perspective from an American: - Yes, typically we can refinance whenever we like, _but_ it extends the mortgage for a 30 year term, along with additional direct immediate costs (plus human inertia). Unless interest rates were alarmingly high for your last go-round (ehem), you're directly incentivized and indirectly likely to not do so. - I own properties in Canada (yay Commonwealth!). The notion of a 30-year fixed does not exist. One can get a 25-year amortization, but typically only with a 5-10 year guarantee for a fixed rate. - As an American, Canadians are insane for buying into this system. Our system is so much more favorable to anyone with good enough credit to be approved for a loan it's literal comedy. Also our standards for approving someone for a loan seem to be lower (that said, I had no credit history in Canada when I started this adventure, so perhaps residents get a better deal). - As a property investor, I'm happy to control for the cash I sink into my investments in interest versus the returns I get from rental revenue. Combining that with exchange rates and US interest rates versus Canadian, I <3 Canada. - Fully variable interest mortgages are for suckers (and in that regard, I do have some regrets). (bias: I <3 Canada regardless -- I'd live in Whistler, BC if circumstances allowed)
- gambiting 3y ago
  >>but_ it extends the mortgage for a 30 years How come? Here in UK you just remortgage for the remaining term of your mortgage, if you have 14 years left you just remortgage for 14 years. Is that something that you have to to do in America, or just what most people choose to do?
  - tzs 3y ago
    In the US lenders generally only offer a few options for the lengths of fixed rate mortgages, with 15 and 30 years probably being the most common. There is generally no prepayment penalty here, so if you want some length that isn't one of the standard ones you can just get a longer one and then pay some extra principle each month to pay it off over the timeframe you wanted.
    - blacksmythe 3y ago
      It is amazing how much less time it takes to pay off a 30 year mortgage if you increase the payments 10%. The first good many years are paying mostly just the interest.
thelastgallon 3y ago
Yes, you can refinance any time with nearly no cost. During covid years, a lot of homeowners refinanced multiple times, each time with a small bonus (under 3K) for refinancing. What people don't understand though is interest payments are front-loaded. Most of the early payments will be almost all interest, and with frequent refinances most of them are paying interest all time time, extending mortgage by a few years. Most only think of cash flow and the payments appear lower, if you don't think about those extra years. https://thepillmethod.com/help-us-celebrate-the-80th-anniversary-of-the-amortized-30-year-mortgage/ https://thepillmethod.com/help-us-celebrate-the-80th-anniver...
- hnav 3y ago
  you can just pay off the loan faster and put whatever interest cut you got towards the principal?
  - analognoise 3y ago
    If you're fixed at 2 or 3%, why bother? You can make a better return putting your money elsewhere.
    - saiya-jin 3y ago
      a common mantra, but almost nobody actually does it
      - gorjusborg 3y ago
        Also, the return is guaranteed in the case of mortgage repayment. The returns from investment are estimated based on historical performance. You can lose money investing, not so paying off a mortgage early.
        bitshiftfaced 3y ago
        At the very least, during periods when interest rates are significantly above your mortgage rate, such as now, you should put it in a money market account instead of in your mortgage. It's the same amount of risk, but it's liquid. Really, you could do a long term Treasury bond for the same reasoning (same risk, same liquidity).
jeanloolz 3y ago
Fixed rate is really common in Europe, definitely not a US thing.

by d_t_w 3y ago

Cerium 3y ago

30 year fixed and 15 year fixed are very common. There is also 5 year fixed then variable, but those burnt a lot of people in 2008 so they have a bit of a bad reputation with some. There are generally no early payment penalties. Refinancing is easy and considered worthwhile whenever the rates improve by 0.5 percent or more.

nostromo 3y ago

Yes you can refinance at a lower rate if/when rates drop. You have to pay some money to do so, but it's insignificant compared to the cost of interest if it's over a percent lower or so. There are usually no pre-payment penalties. I imagine a lot of people buying houses right now are counting on mortgage rates dropping in the future.

bushbaba 3y ago
*so long as your house appraised for high enough value to meet the debt to equity ratio. So if mortgage rates go down, but your home price crashes 10%, you’ll likely only be able to refinance by significantly paying down the mortgage balance.

pxeboot 3y ago

If rates drop, you can refinance immediately, assuming your credit score/income are still sufficient enough to qualify for a new mortgage.

rpearl 3y ago

you can refinance when rates are lower. The question is when they will be.

Daviey 3y ago
And pay significant early termination fees.
- lukevp 3y ago
  Mortgages in the us don’t typically have early prepayment penalties of any kind.
frumper 3y ago
Unless prices drop below your mortgage balance.
- psunavy03 3y ago
  Prices are not likely to crash with the conditions we have in place currently. Prices crashed in 2008 because there was 10 to 15-year-long bipartisan push that "everyone needs to be a homeowner." This let banks write adjustable-rate loans to people who arguably never should have been touching a mortgage given their financial situation. And when interest rates reset, enough people started defaulting that the whole system collapsed. And that's without getting into the funny business of securitizing those bad mortgages and using them as investment vehicles. These days, mortgages are generally very well-underwritten and only given to people who can afford to pay. High interest rates are going to put a cap on prices, but where we're at now is a supply crunch. 2008 wiped out the homebuilding industry and now there's a supply crunch with not enough houses for the amount of people who want to buy, which is driving up prices.

forrestthewoods 3y ago

Yes, you can refinance to a lower rate. It’s easy and people do it all the time. There is some cost overhead so you don’t do it everytime rates drop a tiny bit. But if they drop more than 1% it’s easily worth it.

tzs 3y ago
> Yes, you can refinance to a lower rate. It’s easy and people do it all the time. It's almost unbelievable how easy it can be. I got a call from the company that held my mortgage asking why I hadn't responded to the refinance offer they had sent me. I told them I wasn't aware of any such offer. They said they had FedExed an offer to me a couple weeks earlier. I went and looked on the front porch, and sure enough there was a thick FedEx package there. I hadn't noticed that because I used the back door as my main entry/exit door. Inside was all the paperwork, prefilled, for a refinance with instructions that said all I had to do to accept was call them and tell them, and then they would send a notary to meet me at home or at my office with a copy of the documents for me to sign.

positr0n 3y ago

It's easy to refinance at a lower rate. You essentially just pay for and qualify for a new mortgage, the fact that it's a refinance and not a new house you're buying is mostly immaterial. So you're out a few grand in fees, and if you somehow become less creditworthy it may not work. When interest rates first spiked it seems like the prevailing wisdom was that they wouldn't stay high for long, so buyers should just swallow the higher monthly payment "for a year or two" then plan to refi. I don't hear that advice much anymore!

bhawks 3y ago

The American mortgage market is very unique from the perspective that it has 10, 15 and 30 year fixed rate debt. There are generally no prepayment penalties and no balloon payment (each payment is the same amount even the last one). You can pay down extra any time you want and it reduces your principal appropriately. The maturities and payment structures are quite generous compared to many other countries mortgage products. Of course there are shorter maturities and different types of adjustable rate mortgages but these are not popular (fallout from 2008 crisis and the general low interest rate environment). Edit: there is also 40 year fixed products starting to be offered.

thinkerswell 3y ago
What is the cause of it being do different from the rest of the world?
- patd 3y ago
  We also have 20 to 30 years fixed rates in Belgium. It seems to be possible in France, Germany, The Netherlands, … So I’m not sure that the US is actually an exception.
  - afandian 3y ago
    A family member recently got a long term fixed low rate mortgage in Belgium and I’m curious about how different things are compared to the UK. UK mortgages are higher, shorter term. Is the Belgian bank losing money compared to the UK one? Is there state intervention?
    - patd 3y ago
      There is no state intervention. Depending on market conditions, a 30 years fixed can have a higher rate than 25 years. It’s basically hedged with long term bonds (Belgian or European) + a profit margin for the bank + risk based on your profile (age, health, employment history, …) I guess UK banks are just hedging with shorter term bonds compared to Belgian ones.

jsolson 3y ago

A perspective from an American: - Yes, typically we can refinance whenever we like, _but_ it extends the mortgage for a 30 year term, along with additional direct immediate costs (plus human inertia). Unless interest rates were alarmingly high for your last go-round (ehem), you're directly incentivized and indirectly likely to not do so. - I own properties in Canada (yay Commonwealth!). The notion of a 30-year fixed does not exist. One can get a 25-year amortization, but typically only with a 5-10 year guarantee for a fixed rate. - As an American, Canadians are insane for buying into this system. Our system is so much more favorable to anyone with good enough credit to be approved for a loan it's literal comedy. Also our standards for approving someone for a loan seem to be lower (that said, I had no credit history in Canada when I started this adventure, so perhaps residents get a better deal). - As a property investor, I'm happy to control for the cash I sink into my investments in interest versus the returns I get from rental revenue. Combining that with exchange rates and US interest rates versus Canadian, I <3 Canada. - Fully variable interest mortgages are for suckers (and in that regard, I do have some regrets). (bias: I <3 Canada regardless -- I'd live in Whistler, BC if circumstances allowed)

gambiting 3y ago
>>but_ it extends the mortgage for a 30 years How come? Here in UK you just remortgage for the remaining term of your mortgage, if you have 14 years left you just remortgage for 14 years. Is that something that you have to to do in America, or just what most people choose to do?
- tzs 3y ago
  In the US lenders generally only offer a few options for the lengths of fixed rate mortgages, with 15 and 30 years probably being the most common. There is generally no prepayment penalty here, so if you want some length that isn't one of the standard ones you can just get a longer one and then pay some extra principle each month to pay it off over the timeframe you wanted.
  - blacksmythe 3y ago
    It is amazing how much less time it takes to pay off a 30 year mortgage if you increase the payments 10%. The first good many years are paying mostly just the interest.

thelastgallon 3y ago

Yes, you can refinance any time with nearly no cost. During covid years, a lot of homeowners refinanced multiple times, each time with a small bonus (under 3K) for refinancing. What people don't understand though is interest payments are front-loaded. Most of the early payments will be almost all interest, and with frequent refinances most of them are paying interest all time time, extending mortgage by a few years. Most only think of cash flow and the payments appear lower, if you don't think about those extra years. https://thepillmethod.com/help-us-celebrate-the-80th-anniversary-of-the-amortized-30-year-mortgage/ https://thepillmethod.com/help-us-celebrate-the-80th-anniver...

hnav 3y ago
you can just pay off the loan faster and put whatever interest cut you got towards the principal?
- analognoise 3y ago
  If you're fixed at 2 or 3%, why bother? You can make a better return putting your money elsewhere.
  - saiya-jin 3y ago
    a common mantra, but almost nobody actually does it
    - gorjusborg 3y ago
      Also, the return is guaranteed in the case of mortgage repayment. The returns from investment are estimated based on historical performance. You can lose money investing, not so paying off a mortgage early.
      - bitshiftfaced 3y ago
        At the very least, during periods when interest rates are significantly above your mortgage rate, such as now, you should put it in a money market account instead of in your mortgage. It's the same amount of risk, but it's liquid. Really, you could do a long term Treasury bond for the same reasoning (same risk, same liquidity).

jeanloolz 3y ago

Fixed rate is really common in Europe, definitely not a US thing.