Mortgage rates in 2018 are still historically low. But there is no doubt they have climbed substantially from record lows in the last three years. The days of 3% thirty-year fixed mortgages are behind us, and according to Zillow, current refinance rates are higher than they were a year ago. It is possible that rates could continue to rise when the Federal Reserve meets again later this year, so it could be a good time to refinance before it is too late.
Next Fed Meeting
Are Homeowners Waiting Too Long to Refinance?
As rates are still low in the 4.5% range, you might think that homeowners would be going out to refinance like crazy. Having a low mortgage rate and a lower payment each month can really boost your finances. But surveys show that most homeowners are not refinancing in 2018, and the number of refinance applications have dropped from three years ago.
One of the problems is that many homeowners are not sure that the hassle and expense of refinancing is worth it. They worry about things besides the low interest rates, such as, how they felt when they last did a mortgage application. Who likes to go through all the paperwork hassle anyway?
Many financial experts argue that more homeowners should be thinking about refinancing soon. Here are the reasons why.
#1 Rates Are Likely to Rise Next Year
The economic signs are all around us. Unemployment is very low, the GDP growth rate is above 3%. Wages are up, and home values are up. We have seen mortgage interest rates rise by almost a full percentage point from a year ago for a 30-year fixed rate mortgage. The Fed has met and increased its key interest rates several times in the past two years.
With all of these strong economic signs, it is natural that interest rates for home loans will probably continue their slow rise. It is possible, according to some financial experts, that we will see 5% interest rates in 2019. If people wait that long, many will no longer be able to refinance because the rate will be higher than they pay now.
#2 The 1% Rule Doesn’t Apply Anymore
There is an argument that you should not refinance your home loan unless you can save 1% on your rate. This is an old argument from 50 years ago. That was when closing costs were much bigger, and loan sizes were smaller. And, many homeowners stayed in the same home until they died.
At that time, loans were under $60,000, and a homeowner needed to drop their interest rate by 1% to save about $1,000 each year. However, with the typical loan size today over $200,000, you can save up to six times as much with a 1% drop in rate!
Therefore, even a mortgage interest rate decrease of .25% can sometimes make substantial difference in your payment. You do not need to save 1% on your rate to save a lot every month in interest charges.
#3 You Will Recoup Your Closing Costs in Most Cases
Many homeowners also pass on doing a refinance because they think they will not recoup their closing costs. This line of thinking is reliant upon a break even approach that does not make much more sense than the 1% fallacy.
The problem with using this break-even method to decide on a refinance is that the typical break even formula makes some erroneous assumptions:
- That you will not ever want to refinance their home again.
- That you will not need to refinance again.
- That you will never sell your home.
For some homeowners, these assumptions may be valid. But times have changed greatly from decades past. Most people do not live in one home forever; it is estimated that most Americans live in a home for six years and then sell.
The typical closing costs for a refinance are 2% to 5%. You could easily recoup your costs in a few years, so it still makes sense to refinance for many of us.
#4 No Closing Cost Refinances Are Available
Many homeowners are unaware of ways to minimize or eliminate their out of pocket costs when they refinance: the no closing cost mortgage. These are mortgages that do not have any closing costs. When there is no closing costs for your mortgage, you do not need to worry about a break-even point and you do not have to consider the 1% savings model either. If you can lower your rate and not pay anything, it makes a lot of sense to refinance.
Generally, you can get a no closing cost mortgage for a $250,000 or $300,000 loan by increasing your rate by .25%. Yes, you will pay a slightly higher rate, but you are still saving over your current rate, and are paying nothing out of pocket
Mortgage Rates in the News
We have seen a string of positive reports bolstering employment rates and many economists consider this to be a a sign of future inflation. Mortgage rates trended upwards and markets will likely to be waiting for the next Federal Reserve Meeting.