Record low mortgage interest rates raise question of when to refinance
With mortgage interest rates setting new record lows almost every week for more than two months, two questions naturally come to mind: How low can they go? And should I refinance -- again?
This week rates fell to levels that many people in the mortgage business thought they would never see. Freddie Mac reported on Thursday that the average rate on a 30-year-fixed-rate loan was 4.44 percent, with 0.7 of a point in prepaid interest. [One point equals 1 percent of the loan amount.] Loans fixed for 15 years also hit a new record, 3.92 percent, with 0.6 of a point, on average.
Loans that are fixed for five years and then convert to annual interest-rate adjustments averaged 3.56 percent this week. One-year adjustables averaged 3.53 percent. Both charged an average of 0.7 of a point, according to Freddie Mac.
Frank Nothaft, Freddie Mac's chief economist, said in a report issued this week: "The ability to lock in a principal and interest payment at below 5 percent for 30 years is rare enough. The fact that a 30-year fixed-rate mortgage can be obtained for 4.5 percent, or a 15-year mortgage for 4 percent is an amazing opportunity for borrowers."
However, Greg McBride, senior financial analyst for Bankrate.com, said: "The pool of refi candidates has been dwindling because we have been below 5 1/2 percent for the past year. People may not want to invest the time and money in another go-round."
He added that, in markets where values are still declining, an appraisal that was high enough to support a refinance just eight months ago may not be at the same value now. For much of the Washington metro area, however, values have turned upward. The National Association of Realtors reported on Wednesday that prices for single-family homes in the Washington metropolitan area were 3.9 percent higher in the second quarter than a year ago. For condos and co-ops, prices were up 1.5 percent.
Homeowners in the Washington area should not assume that they wouldn't qualify for a new loan, said Malcolm Hollensteiner, mid-Atlantic regional manager for PNC Mortgage. "There's large percentage of the population that doesn't feel they are eligible to refinance, but they are. . . . Until you go through the process, you don't know if you do."
Rates are higher on jumbo loans for amounts greater than $729,750, which are too big to be eligible for purchase by Freddie Mac and Fannie Mae. But the spread between jumbos and smaller, "conforming" loans has narrowed significantly this year, Hollensteiner said. He said borrowers have to pay interest rates about half to three-quarters of a percentage point more for jumbos. A year ago the difference was about 1 to 1 1/2 percentage points.
Refinancings now constitute most of the mortgage market, accounting for 78 percent of all loan applications nationwide, the Mortgage Bankers Association reported this week. And many refinancers are taking the opportunity to move into shorter-term loans that carry a lower interest rate and build equity faster. That's a particularly attractive option for people who hope to pay off their mortgage before retirement.
Economists at Freddie Mac reported this week that during the second quarter, 30 percent of borrowers who were refinancing out of 30-year fixed-rate loan chose new fixed-rate loans lasting 15 or 20 years. That's the highest level of term-shortening the company has seen in six years. But Hollensteiner said he is not seeing that trend locally. "I don't think it's normal in this market. People are more focused on lowering their monthly payments." And a significant number are pulling out equity when they refinance, using the cash to pay for home improvements or education expenses, he said.
Unless you had a high rate to begin with (say 6.5 percent or more) switching to a shorter-term loan boosts the monthly payment -- but can save a lot of money over the duration of the loan. Using a loan-comparison calculator on washingtonpost.com, you can see the difference. For a $200,000 loan, switching from a 30-year rate at 5 percent to a 15-year loan fixed at 3.92 percent, the monthly payment would rise by about $400 per month. But by paying off the loan in half the time, you would save about $122,000.
But refinancing isn't free, even if the lender offers to roll over the expense into your new loan balance. Hollensteiner said non-recoverable closing costs, such as loan-application fees or government recordation fees, are typically about 1 percent of the loan amount. And, depending on variables such as the day of the month you close on the new loan, you could have to come up with a similar amount in expenses that you will recover after closing, say from a disbursement from your old escrow account. These expenses include property tax payments and daily interest expenses. "It's all a wash, but it's still money you need to have at closing," he said.
Might rates go even lower? Perhaps, but probably not by much, according to Celia Chen, senior director at Moody's Analytics. "I don't think they're going to fall much further; they're at a record right now," she said. "And even at this low rate, it doesn't seem to be doing much to support the housing market."
And though it's remarkable to note how many weeks in a row that Freddie Mac's mortgage rate series has marked new records (seven times in the past eight weeks), the week-to-week changes have been tiny, usually only one-hundredth or two-hundredth of a percentage point at a time. Chen said she expects mortgage interest trends to remain "fairly stable at a low rate."