Mortgage rates have been hitting historic lows for five weeks in a row. But
that doesnâ€™t mean you should refinance your mortgage just yet.
The average rate for 30-year-fixed-rate mortgages fell to 3.94% for the week
ended Oct. 6, according to mortgage-finance giant Freddie Macâ€”the lowest on
record. Rates on 15-year loans, meanwhile, have fallen to a record low of 3.28%.
While mortgage rates vary by region even among the nationâ€™s biggest lenders,
they are down throughout the country for borrowers with excellent credit.
Citigroup, the third-largest U.S. bank by assets, is pitching a 4.193% rate on
30-year-fixed loans and a 3.806% rate for 15-year-fixed mortgages. EverBank
Financial of Jacksonville, Fla., is offering Cincinnati-area residents a 3.89%
rate on 30-year fixed-rate loans.
Steve Walsh, who heads mortgage lender Scout Mortgage in Scottsdale, Ariz.,
says he has seen a surge in interest among borrowers looking to take advantage
of low rates. â€œThereâ€™s a feeling that rates are basically at the lowest they can
get,â€ he says. But are they?
No one can predict the future, of course, but policy makers seem intent on
pushing rates down even further.
The Federal Reserve, for example, is trying to move rates lower by buying
more mortgage-backed securities. And Obama administration officials are talking
to lenders about ways to reinvigorate the Home Affordable Refinance Program, a
government initiative to help borrowers refinance even if they have little or no
equity left in their homes.
The goal for both: to get rates low enough so that more people will find it
beneficial to refinance. If people start doing it en masse, it could help the
â€œIn the short term, rates could fall,â€ says Brad Hunter, chief economist for
Houston-based Metrostudy, a housing-market research firm. â€œIn the longer term,
rates will rise as the economy starts to strengthen.â€
If that were to play out, then refinancing now, with rates still around 4%,
could be a mistake. Thatâ€™s because the chances are good that if you own a home,
and have significant equity in that home and good credit, you already have
refinanced in the past few years. Because refinancing involves costsâ€”typically
2% of the mortgage valueâ€”it often doesnâ€™t pay to refinance every time rates tick
down, tempting though it is.
â€œDonâ€™t become a refinance junkie,â€ says Greg McBride, a senior financial
analyst at Bankrate.com, a consumer-information site. â€œYou pay for it later in
the form of closing costs.â€
So how far do rates need to fall before it makes sense for you to refinance?
Economists at the University of Chicago have tried to answer the question.
The ideal refinance rate must factor in closing costs, marginal tax rates,
the number of years left on the mortgage and other factors, the economists say.
Homeowners often make decisions based on faulty assumptions about rates, says
David Laibson, an economics professor at Harvard University and one of the
Chicago studyâ€™s authors. â€œMortgage rates follow what we call a random walk, and donâ€™t bounce back from
lows like most people assume,â€ he says.
In other words, what goes down could keep going downâ€”even if it goes up for a
little while first. If you catch the first big dip, you can miss later ones that
offer even better opportunities.
The economists produced an online calculator, at zwicke.nber.org/refinance/, that distills their theory into a
tool that calculates how far interest rates need to fall for homeowners to
derive value from refinancingâ€”the â€œoptimalâ€ refinance rate.
For example, their formula suggests that a homeowner with a $400,000 mortgage
with 25 years left on a 30-year-fixed rate mortgage at 4.75% shouldnâ€™t refinance
until rates fall to below 3.51%, assuming 2% closing costs.
The risk of waiting for a lower rate, of course, is that it will never come.
If you are unwilling to take the gamble, your best bet is to negotiate hard on
The conventional wisdom is that it doesnâ€™t make sense to refinance unless you
can shave at least a point off your interest rate. Thatâ€™s because you donâ€™t want
your â€œbreak-evenâ€ pointâ€”when your savings exceed your refinancing costsâ€”to be
longer than two years or so.
But if you can persuade your lender to waive the fees, or most of them, you
might need only a half-point of savings to make a deal worthwhile, says
Bankrate.comâ€™s Mr. McBride.
Last week, Michael Allison refinanced his $417,000 mortgage on a
three-bedroom California Ranch-style house in Santa Barbara, Calif. The
41-year-old fitness-center owner says he will save $200 a month by switching
from a 30-year fixed-rate mortgage at 4.87% to one at 4.25%.
â€œItâ€™s an absolutely great deal and didnâ€™t cost me anything,â€ Mr. Allison
says. His lender, Provident Savings Bank in Pleasanton, Calif., covered the
closing costs after his real-estate agent made some calls to the firm.
With a little negotiation, homeowners can persuade lenders to cover their
fees. â€œItâ€™s not a free lunch,â€ Mr. McBride says, because borrowers get slightly
higher rates in exchangeâ€”but it is a good way to minimize your upfront
Another option thatâ€™s growing in popularity: refinancing a home at a shorter
termâ€”say, 20 or 15 years. If you can find a rate that keeps your monthly payment
about the same as you were paying on your old 30-year loan, the decision is a
no-brainer, says Mr. Walsh of Scout Mortgage.
Lloyd Qualls, a 57-year-old accountant in Mesa, Ariz., decided to do just
that. Last month he ditched his 30-year fixed-rate loan at 4.875% for a 15-year
fixed-rate loan at 3.375%. While that boosted his payments by $89 a month, it
will shorten his payment period by 13 years and save him $104,233 on interest
over the life of the loan.
This article came from Car Market Matters and was written by Jessica Silver-Greenberg