The cheapest refis ever may soon end. Here's how to know if you should make a move before the window closes.
The recent boom in refinancing may be coming to an end. If you haven’t refinanced — or even if you have — it’s worth considering it before rates start rising and the door slams shut. Rates for a 30-year fixed-rate mortgage have been under 4 percent for two years and now are around 3.5 percent, down from almost 4 percent on Jan. 1.
True, you’ve heard this warning before. Pundits have been predicting a rate hike for a year or longer. Here are some reasons why this time may be different.
There are new signs the Federal Reserve will soon raise the interest rate it charges banks and that, in turn, is likely to push up home-loan rates. The Federal Reserve has waited to let the economy grow stronger and held off after Britain’s “Brexit” vote (the decision to leave the European Union) to help buffer the United States from any ripples of economic instability.
New signs of an imminent Fed rate hike include:
- The Fed chief speaks. In August, Federal Reserve chief Janet Yellen said in a speech, “I believe the case for an increase in the federal funds rate has strengthened in recent months.” Watchers of the economy take that to mean a hike in the federal funds rate.
- The election soon will be over. CNN writes that the Fed probably is waiting to act on rates until after the Nov. 8 presidential election.
- The economy is growing. The U.S. economy is stronger and may no longer need propping up. Growth has been minuscule all year — just a 1.1 percent annual rate estimated for this year’s second quarter — but several economic experts are predicting that a routine government report due out in late October will show growth has accelerated to 3 percent, The Wall Street Journal reports. More conservative analysts predict a 2.6-percent rise — still a healthy improvement. The divide between the richest and poorest Americans still is huge, but things are improving. As The New York Times writes, the country last year enjoyed the “largest economic gains in nearly a generation,” citing:
* Fewer people are in poverty.
* Record numbers of Americans are covered by health insurance.
* Incomes grew at all income levels.
How to know if refinancing is worth it
Will you come out ahead if you refinance? The answer depends on the particulars of a loan offer. Refinancing brings down the monthly mortgage payment, but it only becomes worth it when those month-to-month savings cover the cost of refinancing. That means it’s not worth it unless you stay in the home until that break-even point.
To find out when this break-even point would occur, you can:
- Plug the information into an online calculators like this one, from Citi.
- Ask the lenders you meet with to show you the break-even point of their loan offers.
Here are five reasons why refinancing your mortgage might be a good idea:
1. Lower your monthly payment
A lower monthly mortgage payment is always welcome. Refinancing to a lower interest rate should drop your payment, although the details depend on your loan amount, your credit score and other factors. (Bone up on mortgage basics by reading “Home Buying 101: How to Choose the Best Mortgage Option for You.”)
2. Get rid of your mortgage insurance
If you bought your home with a down payment smaller than 20 percent of the purchase amount, you probably were required to buy mortgage insurance. (It protects your home’s lenders and investors, not you). It’s expensive. Private mortgage insurance (PMI) charged on conventional loans, costs 0.5 percent to 1 percent of your loan’s value. Federal Housing Administration mortgages include mortgage insurance, too. You have to compare the loans you’re offered and their entire cost to tell which is the better deal. Your lender can help you do this.