Mortgage Rates Are at Record Lows – Have You Considered Refinancing Your Mortgage?

Monday, October 11th, 2010 by Charles Mayfield, CFP®


Fifteen-year fixed rate mortgages averaged 3.72% last week (Oct 7), the lowest rate on record since Freddie Mac began tracking mortgage rates 39 years ago in 1971, according to Reuters and The Wall Street Journal.

Thirty-year fixed rate mortgages averaged 4.27% the week ended October 7th, also a record.  Few homeowners currently have a fixed rate this low.  If you have an ARM, or any kind of adjustable rate home loan, then this decision is even easier. Now may be the time to lock in a low monthly payment on your home loan.

If your credit scores are good, and you’re not planning to move in the next few years, then it makes a lot of sense to refinance your current mortgage and lock in a super low rate for the duration of your time in your house.  You could save hundreds of dollars per month on your payment and potentially thousands in interest over the life of the loan.

Here are a few factors to consider as you think about refinancing:

Use a scrupulous lender.  Shop around. Avoid banner ads and flashy billboards from companies with hidden fees. It’s smart to use a bank you have a relationship with or get a referral from someone you trust who has refinanced lately and had a good experience. Ask whether the lender will pay for the appraisal and origination fees. Negotiate from a position of strength.

Don’t pay points. Paying discount points means that the borrower offers to pay the lender an upfront sum in the form of “discount points” to reduce the interest rate on the loan, thus obtaining a lower monthly payment. It probably doesn’t make sense to purchase discount points unless you know that you’re not going to sell the house or refinance before the calculated “breakeven point.” Selling or refinancing prior to this point will result in a net loss for the buyer.

Don’t get greedy and try to take cash out. Match the amount you borrow with the amount you owe.  It makes qualifying for the loan much simpler. Remember that your house is a long-term investment and not an ATM.

Knowledge & information are important. Make sure you can document your income and be certain your house is worth more than you need to borrow.  Get a free copy of your credit reports and clean up any errors to avoid any surprises or snags.

While you’ve got your documents out and are getting organized, you may also want to evaluate whether you have the best deal on your homeowner’s insurance. Ask a trusted adviser or agent to take a look at your policy and see if the limits and deductibles are where they should be, or whether another carrier may able to offer you a better deal.

If you live in the home that you’re refinancing, make sure you take advantage of your local homestead exemption. Check with the county government if you’re unsure.  Also, if you’ve recently turned age 65 (or older) you may be exempt from paying some property taxes for local schools that other homeowners have to pay.

Will rates stay this low for awhile? No one really knows for sure. Mortgage rates are generally tied fairly closely to intermediate- and long-term Treasury yields. If the Federal Reserve continues their policy of “Quantitative Easing” by buying Treasury bonds, that will keep Treasury rates fairly low. If, on the other hand, Bernanke & the Fed see strength in the economy, or become concerned about the deficit and their balance sheet, then they may put a stop to the easy money policies that have led to low rates.

There are a number of reasons why the Federal Reserve may continue on this path at least into November:

  1. They believe lower rates will lead to more economic activity
  2. More economic activity would likely prevent the possibility of a double-dip recession
  3. Mid-term elections are coming up – No one in Washington wants a slow economy
  4. Lower rates usually mean a weaker dollar, which is considered good for exports
  5. More exports means more manufacturing, which means more jobs
  6. More jobs means lower unemployment and leads to more consumer confidence
  7. Lower unemployment and more people working means more tax revenue for the government
  8. Quantitative easing helps to avoid deflation (to be avoided at all costs)

The process of refinancing is not painless or quick.  But it can be well worth the effort.  The government wants you to have more disposable income, so they are keeping rates low for now.  Why don’t we keep more money in our accounts, instead of paying it to someone else?

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