Rock-bottom mortgage rates may soon be a thing of the past. Make your move before the window closes.
Whether you’re thinking of buying a home or refinancing one, you need to take a fresh look at the mortgage market. Rates recently took a huge jump and the lowest rates in modern history may soon be a memory.
Rates for a 30-year fixed-rate mortgage had been around 3.5 percent, but in just the last couple of weeks have now climbed to over 4 percent.
Doesn’t sound like much? Well, if you’re borrowing $300,000, that half percent will cost you an extra $85 a month. Over 30 years, that’s more than $30,000; enough to retire a year earlier or put a kid through college.
And it gets worse. As I write this, the odds of a Federal Reserve rate hike in mid-December are now 100 percent, according to the futures market. While mortgage rates are set by the market, not the Fed, these rates, along with rates on everything from credit cards to car loans, often move in lockstep. And the December central bank rate hike will probably not be the last. A recent article from CNBC quotes Wall Street’s Goldman Sachs as predicting higher rates in 2017:
While the U.S. central bank’s current forecast is for two rate hikes next year, Goldman’s projection calls for the Fed’s short-term rate target to rise by 100 basis points, or a full percentage point — the equivalent of four quarter-point hikes.
Again, the Fed funds rate isn’t directly tied to mortgages. But should mortgage rates rise a full percent next year, from today’s four percent to five percent, that would increase the monthly cost of a $300,000, 30-year loan by an additional $178 per month, or $64,080 over the life of the loan.
Why are rates rising? Can they come back down?
Rates are rising for several reasons. Inflation is ticking higher as wages rise and the economy continues to show improvement. President-elect Trump has promised to cut business regulation and taxes, while spending more on defense and infrastructure. If these things materialize, the economy will grow further, fueling higher inflation, bigger potential government deficits and higher interest rates. These are the reasons both the stock market and interest rates have recently been on the rise.
Will this trend continue? That’s impossible to know, but at least for now, the smart money is suggesting the path of least resistance for interest rates is up.
How to know if refinancing is worth it
Will you come out ahead if you refinance? The devil is in the details.
Refinancing to a lower rate lowers a monthly mortgage payment, but it’s only worth it if the month-to-month savings exceed the cost of refinancing. In short, it’s not worth it unless you stay in the home until you’ve saved more than you paid.
Your break-even point is fairly simple to compute: Just divide your total refinance costs by your monthly savings. The result will be the number of months it will take to break even. Example:
- Total cost to refinance: $2,000 (This includes all expenses and fees, from the initial appraisal to the final closing costs.)
- Monthly savings from lower rate: $100
- Months to break-even: 20
In this example, if we plan to stay in the house for more than 20 months, the refinance will pay for itself. If not, we’ve endured the hassle of refinancing and lost money doing it.
If computing your break-even yourself is too much trouble, you can also plug the information into an online calculator like this one.
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 lender, not you.) Private mortgage insurance (PMI) charged on conventional loans can cost 0.5 percent to 1 percent of your loan’s value. Federal Housing Administration (FHA) mortgages include mortgage insurance, too.
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