Mortgage Rates on the Move: Time to Refinance?
With mortgage rates bouncing up-and-down over the past month, you might be wondering if it's a good time to refinance. Or if it's not?
When the Federal Reserve terminated its program of buying mortgage-backed securities at the end of March, average 30-year fixed rates spiked from 5.09% to 5.27% over the course of the first week in April.Then the rate settled back to 5.17% for the week ending April 16, according to the New Jersey-based mortgage research firm, HSH Associates.
While these "flares" in the mortgage rates are normal in both prosperous and recessionary times, real estate experts predict mortgage rates are going to climb over the long term. Keith Gumbinger, vice president of HSH, forecasts that given the economy and unemployment conditions improve, rates will creep towards 5.8 to 6% by the end of year.
"With all the money government is pumping in, it's inevitable that rates will go up," says Keith Stewart, a mortgage consultant with NorthPoint Lending Group, Inc. "For those holding out for rates to go lower than they were, I'd say 'you better jump in."
Even though mortgage brokers say there's no better time than the present to refinance, as a homeowner, the best course of option may depend on your financial situation and how long you plan to stay in your home.
Adjustable-Rate Mortgages Vs. Fixed-Rate Mortgages
Most real estate advisors are suggesting borrowers with adjustable-rate mortgages (a loan that usually readjusts after a period of 5 or 10 years to the current mortgage rate) move to a fixed-rate loan if the homeowner is financially solvent.
"If you plan to stay in your mortgage when your plan starts to readjust, you need to refinance," says Rebel Cole, an associate professor of finance and real estate at DePaul University Chicago."It's almost certain in five years, mortgage rates are going to be double."
But some homeowners are reluctant to move to a fixed-rate plan because they're either holding out for rates to drop or they're saving money in the short term with a low ARM rate (which on average is a point lower than the 30-year fixed). Once borrowers switch to a fixed-rate, they might see a hike in their monthly mortgage payments. Other drawbacks of refinancing include having to pay down a greater percentage of your balance, additional broker and appraisal fees, and more stringent loan qualifications.
However, there are exceptions with the adjustable-rate mortgages. As the 30-year fixed rate hovers around 5%, the rate on the 5/1 ARM is about 3.9% and 7/1 ARM is 4.1%. This lower rate is attractive specifically for someone planning to be in their house for only five or seven years, says Stewart, but not for a buyer uncertain whether they'll stay longer.
Some brokers are advising their clients, who can qualify for the payment, to move from a 30-year to a shorter term loan to save thousands of dollars on the interest of their mortgage.
For example, Stewart says, if you are seven years into a 30-year fixed loan, he'd suggest refinancing to a 20-year loan. With rates at historical lows, a borrower could get a lower rate for refinancing and eliminating three years of mortgage payments. The downside is that your monthly payments may be larger.
But Cole disagrees adding there's no reason to bind yourself into a contract to pay more. If you can afford it, he proposes sending in your mortgage payment every two weeks.
"Financial flexibility is valuable," he says. "If something happens, you are on the hook for that money."