Should You Refinance Now?

Mortgages haven’t been this cheap for decades. You would have to go back to the 1950s to find mortgage rates that compare with those in 2010. On October 14, Freddie Mac’s weekly survey estimated the average interest rate on the 15-year FRM at 3.62% (a record low) with 0.7 points. Additionally, the 30-year FRM was averaging 4.19% nationally with 0.8 points.(source)

On October 14, the Mortgage Bankers Association reported that applications for refinance had increased 24% in the past week to a pace unseen since April 2009.(source) Rates like these just beg homeowners to refinance.

If you can 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. 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 intend to live in your home.

Let’s say your refinance frees up $150 for you each month. Sounds great, right? It isn’t 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, refinancing is hardly worth it.

If you plan to live in your 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 moving from a 30-year loan to a 15-year loan or vice versa, or if you are among those getting out of “ARMs way” and refinancing into a fixed-rate mortgage, you’ve got more variables to think about.

How long will rates stay this low? It is hard to say. On April 10, 2010, a New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”.(source) They went down instead.

Mortgage rates are heavily influenced by the yield of the 10-year Treasury. As the average mortgage is either refinanced or paid off within 10 years of origination, rates often move up or down in relation to the benchmark Treasury yield.

Rates could go even lower. Many economists believe that 10-year Treasury yields will fall further. The Federal Reserve is signaling it is planning to print money and buy Treasuries to cheapen the dollar, help the stock market and stoke a little inflation. Fed chairman Ben Bernanke referenced that option in an October 15 speech, and analysts widely believe the Fed will announce such a move in early November. (source)

If the Fed enters the bond market as a major player and buys hundreds of billions of dollars worth of Treasuries (a possibility), Treasury prices will surely rise and Treasury yields will fall. Correspondingly, long-term interest rates will be reduced a bit more.

A tendency to consider. Through the years, bond investors have often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note.(source) On November 3, 2008, 10-year Treasury yields dipped below 4% – and they have stayed under 4% ever since, rising no higher than 3.98% on June 10, 2009.(source)(source) In October, the yield of the 10-year note has vacillated between 2.4% and 2.6%, and rates on the 30-year FRM have unsurprisingly averaged around 4.2% to 4.3%.(source)

While the April 2010 New York Times article was wrong about the short term, interest rates will undeniably move north at some point – perhaps sooner than we think.

Be wise and think a refinancing thoroughly 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 talk to your fee-only financial planner to determine how your refinance options relate to your overall financial situation.

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