Despite recent upticks in mortgage rates, they’re still at a relatively low point historically. But now that the Fed is cautiously increasing its benchmark rates, you can expect that mortgage rates will start ticking back up, as well. It’s hard to say exactly where the rates will land in the next year or more. But one thing is for sure: if you haven’t already taken advantage of these low rates, now is the time to consider refinancing!
Here’s what you need to know about the mortgage rate trends we’re seeing and whether or not you should be refinancing your mortgage.
The Federal Reserve and Mortgage Rates
First, it’s a common misconception that Federal Reserve interest rate changes drive the mortgage market. In fact, these rate cuts apply to short-term interest rates, and they typically have little to no direct effect on fixed-rate mortgages. That being said, adjustable rate mortgages (ARMs) may be more sensitive to these sorts of rate changes. In fact, depending on the terms of your loan, those of you with ARMs might see higher rates the next time your loan resets.
With that said, the Federal Reserve’s interest rate benchmark tends to have a sort of trickle-down effect on mortgage rates. First, variable and short-term rates (like rates for credit cards and other adjustable-rate loans) will increase. But those rate increases will eventually impact longer-term, fixed-rate loans like mortgages, as well.
In fact, we’ve already seen some increase in prime mortgage rates as the Fed has started to announce its cautious optimism about the economy. Last March, Freddie Mac put the prime mortgage rate for a 30-year mortgage at 3.69%. This March, it’s increased to 4.2%. That’s enough of a jump to make a big difference in a mortgage payment, but it’s still a good deal lower than the 7%+ homeowners were paying back in the early 2000s.
The bottom line here: mortgage rates are already on their way up, and that trend is likely to continue if the Fed keeps increasing its benchmark rate. Don’t expect interest rates to skyrocket overnight, though. The Fed has been cautious so far, and will likely keep moving slowly in the future.
What it Means for You
So with all that said, how do you decide when to refinance your mortgage? Choosing whether and when to refinance your mortgage is complicated, at best. Remember, refinancing carries costs of its own, including closing costs. So you really need to figure out your break-even point for refinancing before you make this choice. Here are the questions you’ll need to ask along the way:
1. How does my current APR compare to what I can get today?
First, you need to know what your current APR is, and then check out what you’re likely to be able to get today. This rate calculator lets you run the numbers according to your current credit score, home value, and mortgage amount. The rates quoted don’t constitute an actual offer, but give you an idea of what you can expect from different lenders. If you want an even better idea of the rate you’re likely to pay, contact a mortgage lender directly.
Compare your estimated new APR to your current APR. Is it significantly lower? Even a tenth of a percent can make a huge impact on a long-term loan like a mortgage.
2. What’s my current loan-to-value ratio?
If you’re upside down on your home — or close to it — you won’t qualify for a refinance, most likely. So check out your current mortgage balance, and compare that to your home’s current value. Don’t know your home’s value? See what other similar homes are listed for near you, or use value-estimating websites. Just keep in mind that these aren’t always the most accurate.
You may need to go through a formal appraisal process for your refinance, depending on the bank’s requirements. This will cost extra, but could also help you qualify for a favorable refinance — especially if your home’s value has increased since you purchased it.
3. How long do I plan to stay in my home?
The key numbers in determining whether or not a refinance is worthwhile are your new APR, your closing costs, and how long you plan to stay in your home. Maybe a refinance will save you $200 a month. Great! But if you pay $1,500 in closing costs, and only stay in your home for three months after the refinance, you won’t break even on those costs.
It’s impossible to predict the future, of course. Maybe some circumstance will come along that will cause you to sell your home sooner than you’d figured you would. But you should generally try to figure out how long you plan to stay in the home, and use that to determine whether or not a refinance is worth your while.
4. What closing costs will I pay?
Finally, you’ll need to figure out how much the refinance will cost. Often, there are up front costs, as well as closing costs. As with a first-time mortgage, you can often roll some (or maybe all) of those costs into your mortgage amount. Just keep in mind that by doing this, you’ll commit to paying interest on those fees!
Refinance costs vary, but they’re often estimated at somewhere around 1.5% of the new loan balance. You may also have costs like title insurance and other fees you paid when you originally took out the mortgage.
Use a Calculator
Now that you’ve got all this information, how do you use it? You’ll need to run it all through a refinance calculator like this one. Put in all the relevant information, and it’ll let you know how long it will take you to break even on your refinance and how much you’ll save over the life of your loan.
Keep in mind while you’re running your calculations that interest rates are climbing each month. However, if you need to take some time to save up for closing costs or get your credit score into better shape, it’s unlikely (though not impossible!) that rates will jump quickly sometime in the next few months.