IS IT TIME TO REFINANCE?
Mortgage rates haven’t been this low since 2005.
Rates really fell this fall. Right now, interest rates on 30-year fixed rate mortgages are at their lowest level in two years: 6.10% as of November 29th, as compared to 6.73% in mid-July.1 Interest rates have fallen on other types of conventional mortgages as well. So this is a prime time to think about refinancing.
If you refinance, keep your long-term goals in mind. Years ago, refinancing came down to one factor: if you could knock a couple of percentage points off your interest rate, you did it. But today, it’s a bit more complex. There are three aspects to consider: a) how much you can save per month, b) lender points and fees, and c) how long you will live in that home.
Let’s say a refi frees up $150 for you each month. Sounds great, right? But it’s not so great if the mortgage company tacks on a point up front (think $1,500-5,000, depending on the amount of your loan) and a few hundred dollars in fees. If you’re only going to stay in that home for a few more years, that refi is hardly worth it. If you plan to live in that home for many years, then it’s a different story; you may be poised for substantial savings. This is a simple example, of course. If you are getting out of “ARMs way” and refinancing into a fixed rate mortgage, or moving from a 30-year loan to a 15-year loan or vice versa, you’ve got more variables to think about.
How long will rates stay this low? It’s anybody’s guess. No one can predict the financial future. But historically, mortgage rates have often moved up or down in relation to the yield of the 10-year U.S. Treasury bond. This is because the average mortgage is either refinanced or paid off within 10 years of origination.2 When bond yields go down, mortgage interest rates tend to go down, and vice versa. So in the near future, it might help to look at what happens with Treasuries. Bond investors have often gauged mortgage interest rates by adding about 1.7% to the current percentage yield of 10-year Treasuries. On November 21st, 10-year Treasury yields dipped below 4%.3 Here in early December, you can find 30-year fixed rate mortgages at 5.80% or lower.4
Think before you make a move. Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist, and be sure to talk to your personal financial advisor to see how your choice to refinance relates to your overall financial plan.
Citations. 1 www.freddiemac.com/dlink/html/PMMS/display/PMMSOutputYr.jsp
2 www.thetruthaboutmortgage.com/what-causes-mortgage-interest-rates-to-move
3 www.bloomberg.com/apps/news?pid=20601103&sid=asbcIbOlmKIQ
4 www.bankrate.com/brm/updates/ybir/ybir_state.asp