Mortgages are cheap. According to Freddie Mac on November 23, interest rates on 15-year Fixed Rate Mortgages averaged just 3.30%. Conventional 30-year home loan rates averaged 3.98%, and ARMs averaged 2.91% for 5/1-year and 2.79% on 1-year.
The yield on the 10-year note was just 2.01% on November 17, and it has been meager all fall. We recently saw all-time lows of 3.26% for the 15-year fixed and 3.94% for the 30-year fixed (in Freddie Mac’s October 6 Primary Mortgage Market Survey).
With the credit squeeze not everyone can, but those who can are refinancing. But should you? If you are considering refinancing, keep your long-term goals in mind. Too often in the past refinance decisions came down to one factor, interest rate. That is too simplistic. 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 a refi 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, that refi might not be 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.
No one knows how long rates will stay this low. Recent history has illustrated that. An April 10, 2010, New York Times headline blared: “Interest Rates Have Nowhere to Go but Up”. The average rate for a 30-year fixed mortgage that prompted the headline was 5.31%, 1.33% higher than today.
Cleveland Fed President Sandra Pianalto told Reuters in November she expects inflation to decline to about 2% from the current pace of about 3.5% and stay there through late 2013. This forecast doesn’t allow for further easing (and the higher interest rates it would encourage). The Fed has kept short-term interest rates near zero for nearly three years, and has shifted $2.3 trillion into long-term Treasuries to help keep borrowing costs lower.
Through the years, bond investors often gauged interest rates on conventional home loans by adding about 1.7% to the current percentage yield of the 10-year note. Dow Jones Newswires polled bond dealers in August for a consensus forecast for the 10-year Treasury yield. They expected yields at year 2011 to be 2.5%. Some strategists and fund managers suggested that benchmark Treasury yields could end the year under 2.0%. If that holds true, 30-year FRMs would remain in the vicinity of 3.6-4.2%
Interest rates will rise and perhaps significantly at some point. A window of opportunity beckons. How long it stays open is anybody’s guess.
Think big picture before you make a move. What will you do with the (saved) money? There are many good uses for money saved from a refinance, among them are increase your cash reserves (ordinary savings), add money to a college fund, increase your contribution to a qualified retirement plan, make systematic premium payments to a non-qualified deferred fixed or indexed annuity, purchase or increase life insurance for yourself or your spouse.
One spectacularly bad idea would be to use the savings to pay down the mortgage faster. There are many reasons this is a bad idea, but it all comes down to this. You can end up wealthier taking the money saved and investing compared to your net wealth after paying down the mortgage.
Before you get out that pen and sign anything, talk about your options for refinancing with a qualified mortgage specialist. Then talk to your financial consultant to see how your choice to refinance relates to your overall financial situation.
Bruce Kuczinski is owner of Kuczinski Financial. Bruce is a retirement planner specializing in fixed and indexed annuities, life insurance and wealth transfer strategies. He may be reached at 321-574-0440 or bruce at kuczinskifinancial.com or www.kuczinskifinancial.com
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