Does it seem like the topic of mortgage rates keeps creeping into your conversations? Whether at work, with family or out with friends, it’s not uncommon to hear that question “have you seen mortgage rates lately?” And it’s a completely valid topic considering the historical trend of 30-year fixed-rate mortgages, having ranged as high as 18.63% in 1981 to as low as 3.31% in 2012. Today, mortgage rates are still at historical lows with over half of mortgage holders paying rates between 3.00% and 4.9%.(1)
For a quick refresher on how mortgage rates are determined – remember, it is based on the bond market (mortgage bonds or mortgage-backed securities). They are bundled into groups of securities and sold on the bond market. The price of these bundled debt securities is driven by national and global news events, which in return affect individual mortgage rates.(2)
The Fed can also impact mortgage rates by lowering the short-term discount rate, as was the case recently on July 31st (being the first time in more than a decade – since 2008 -- this occurred). This is one tool the Fed has used to help meet its economic goals of maximizing employment, stabilizing prices and moderating long-term interest rates, which affect the cost of financial products, such as mortgages.(3)
Understanding how your mortgage rate gets set, brings us to your APR, or Annual Percentage Rate – this is the interest rate applied to your monthly mortgage payment, plus any additional fees included (either upfront or ongoing fees). It’s important to understand your mortgage interest rate AND your loan’s APR, which is often a different number.
So when do you decide if it’s time to revisit your “plan,” in other words, refinance your mortgage? Refinancing is simply replacing an existing loan with a new loan that pays off the debt of the old loan. Simple, right? With the mortgage rates at historical lows, it may be tempting to jump right in, but as with any investment this size, it’s important to weigh your options before making your decision.
Here are some places to start your consideration:(4)
- You have Potential to Save (a lot of) Money – there is potential to save a lot of money by refinancing, especially by paying less in interest over the life of the loan if you lock in a lower interest rate, switch to a shorter loan term or consolidate high-interest-rate debts into lower-interest-rate debts (meaning using your home as collateral for other debts with higher interest, such as credit cards).
Watch Outs:
o Who doesn’t love lower monthly payments? Be sure to understand the amount of interest you will pay over the life of the loan in addition to your ongoing payments. For example, starting a 30-year loan if you only have 15 years left on your current one can significantly increase the total amount of interest paid over time. Ask us to walk you through an amortization table showing the process of paying off the loan and details of each payment (including loan balance, interest charges and the amount of principal applied) to help see where your payments are going and how these will change over time.
o Be cautious of adjustable-rate mortgages (ARMs) – although this structure may lower your monthly payment in the short term, it can then rise to higher monthly payments in the future, in relation to the market. Again, it’s important to understand the life of your loan and how this may adjust over time.
o Refinancing isn’t free. Understand any closing costs and prepayment penalties of the new loan. You can conduct a simple breakeven analysis to understand how your closing costs factor into your overall loan to determine if it’s a better deal than your current setup. - You Can Move into a Better Situation – setting aside your monthly payments, refinancing may make sense to reduce risk or find a better solution over the long term. For example, if you’re currently in an ARM, it may make sense to move to a fixed-rate mortgage. Or if your current lender has not been meeting your expectations, you can use this opportunity to explore other options.
Watch Outs:
o Learn from your past experiences. Knowledge is power and although it’s important to lean on experts to help navigate the waters of the mortgage world, it’s also important to come in equipped with the right questions to make the most informed decision. Remember, you can always get second, third or more opinions, so don’t take your due diligence lightly. - You Can Invest in Your Future – similar to the notion of saving money, a cash-out refinance follows the same logic of replacing your existing mortgage with a new home loan, in this case the new loan would be for more than you owe on your house. The difference gets paid out in cash, which can then be used for future investments like home improvement projects, debt consolidation or education costs.
Watch Outs:
o Although it can be tempting to get access to cash quickly, make sure you’re making this decision for the right reasons. In other words, splurging on an instant gratification such as a tropical vacation or a shiny new car may not be the best use of the money. Ensure this type of loan is absolutely necessary to set you up for a future opportunity.
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Refinancing isn’t free but it can help get you on a better financial track than your current one, if it makes sense for you and your situation. When talking about a big investment, such as a mortgage, it’s critical to get all the facts straight before making any decision. In any case, you can feel confident when you are in the driver’s seat and know you have explored all your options.
(1) https://www.valuepenguin.com/mortgages/historical-mortgage-rates
(2) https://www.thebalance.com/how-are-mortgage-rates-determined-1798392
(3) https://www.usatoday.com/story/money/2019/07/30/federal-reserve-why-does-fed-lower-interest-rates/1861483001/
(4) https://www.thebalance.com/should-you-refinance-315065