It's time to think about refinancing your mortgage.
The bond market is a complicated thing, and it is understandable if most people don’t spend a lot of time thinking about it. But even for Americans who don’t want to spend any mental energy on yield curves, convexity and term premia, there is one simple thing to know about the current tumult in the multitrillion dollar market: It’s time to think about refinancing yourmortgage.
The average rate on a 30-year fixed-ratemortgagewas 3.8 percent at the end of last week. That is down from 4.5 percent as recently as last spring, the lowest since May 2013 and far below the 5 percent-plus rates that prevailed as recently as early 2011.
That raises the possibility that the great American refinancing machine might again chug into motion, leaving Americans with lower monthly payments, more cash in their pockets or both. Homeowners who secured their current mortgage in late 2013 or early 2014, or anytime before mid-2011, may want to at least plug their numbers intoan online calculatorto see if the potential savings are worthwhile.
The math can be as simple as you want or as complex; here’s how to think of the decision.
When considering whether to refinance, you are exploiting the fact that you can fully repay a home mortgage whenever you want and take out a new one. If rates rise, you can stick with your old one as long as you continue to own your home; if they fall, you can pay off the old mortgage and get a new one. Heads you win, tails your lender loses. Seldom in life does this dynamic apply, so it is worth exploiting whenever the opportunity arises.
Everyone’s details are different, but if the current rate is half a percentage point below the rate on your mortgage, a refinance is potentially compelling. If it is closer to a gap of a full percentage point, it may be a slam dunk unless you expect to move soon.
But taking out a new mortgage comes with costs, such as origination and appraisal fees — typically in the low four figures. The open question is whether you will enjoy the benefits of lower rates for long enough to cover that upfront cost.
As a hypothetical, a family that took out a $400,000, 30-year fixed-rate mortgage in June 2013 at 4.6 percent could save $187 a month by refinancing $400,000 at a 3.8 percent rate. (If instead of taking cash out they borrowed only the $389,826 they should owe on the mortgage at this point, they would save $234 a month, reflecting both the lower interest rate and a smaller principal.)
Before taking the plunge, though, our family has to decide how long it expects to stay in the home. If transaction fees add up to $4,000, for example, the family needs to stay in the home for at least 21 more months (if borrowing $400,000; 17 months if borrowing $389,826) to justify the transaction (or a bit longer if you also try to account for the tax savings they are not receiving because they are paying less to the bank in mortgage interest).
Or here’s another intriguing possibility. Let’s say our family has seen its income rise since originally taking out the home loan in mid-2013. The interest rate on a 15-year fixed-rate mortgage is now a mere 2.9 percent. An option would be to refinance the $389,825 currently owed into a 15-year mortgage. That would increase the monthly payment by $623 a month — but would result in paying the home loan off entirely in 2030, not 2043 as the family was previously on track to do.
As with all major financial decisions, the details of each family’s situation can add all kinds of complexity that are worth gaming out and analyzing carefully. But for the economy as a whole, this latest shift in rates has a particular silver lining.
In years past, mortgage rates have dipped when it looked as if the United States economy could be falling back toward recession, and the Federal Reserve intervened with easier money to try to stop that from happening. This time, the economy is looking relatively strong and the Fed is making plans to raise interest rates.
This drop in mortgage rates is being driven by a combination of plummeting oil prices, which are reducing investors’ expectations for inflation in the years ahead, and a tumultuous global economic environment, which is leading investors worldwide to plow money into safe American assets. That includes the bonds packaged by the government-sponsored mortgage finance giants Fannie Mae and Freddie Mac, which in turn fund most of the nation’s consumer mortgages.
In other words, global investors are so desperate for a safe place to park cash and so confident that inflation is nowhere to be found that they are flinging money at United States homeowners. Americans now paying significantly above-market rates on their home loan might at least do them the favor of picking it up.
This article courtesy of the NYT, see link: http://www.nytimes.com/2015/01/20/upshot/its-time-to-think-about-refinancing-your-mortgage.html?emc=eta1&_r=0&abt=0002&abg=0
Author:Mike Siers Phone: 252-489-3861 Dated: January 20th 2015 Views: 955 About Mike: Mike is a top producer in the Nations top Privately owned Real Estate company, Howard Hanna. With a...
About Outer Banks Real Estate Mike and Stacy Siers Howard Hanna
We could give you the scripted bio, but it is the age of Google. Believe me when I say if you are online, you can be found. I want to tell you what you may not know.
Stacy and I have been together for most of our lives. We enjoy being around each other so much we work together. I like to say she keeps me balanced. I have been fortunate to work for many people and companies throughout the Mid Atlantic region and feel that experience has helped me understand people and situations. I have been doing sales for about 20 years, construction during 10 of those years and have managed a few companies along the way. Stacy, operated a HVAC company, managed retail and restaurants. Stacy started in Real Estate in 2008, not the best time if you dare to remember the real estate crash. She motivated me to get my license in 2009 and I started in 2010. I looked at the bad real estate market as an opportunity. A time to learn the market from the bottom up. A time to learn how to sell real estate when no one could buy it. In one of my past jobs, I learned the who, what, whens and hows of sales. I could move products! When I bought my first house out of college, I learned this was one of the most important purchases I would ever make. So when we work with clients, it is about them. We want to know why you are looking, how you want to use the house or what you are selling. What memories you have made from this house. We believe real estate is about people and relationships. We are fortunate to build friendships through real estate. It usually means we go to a lot of dinners in the summer when folks are down. (I really love that part)
The wrap up, Stacy and I won't sell you a house on The Outer Banks of North Carolina. We will work with you, share our knowledge, provide facts and dig for information on every home you are interested in and hopefully grab a bite to eat and share the memories you are making!
We wanted to personally thank you for the great job you did helping us find and purchase our new Outer Banks beach condo. From the minute we inquired on line you were so quick and willing to assist us. Thank you for showing us the right properties and guiding us to stay away from properties that would have resulted in a maintenance nightmare for us. Thank you for fighting to help us get the best price possible. Thank you also for assisting with getting our utilities set up, taking care of our inspection and every detail of the closing. It was extremely comforting knowing that you had our best interest in mind and worked so hard to ensure that we got the best deal possible. Never once did you take more than a few minutes to respond to our texts and emails. We were so impressed and blessed by your honesty, integrity, expertise and strong knowledge of properties in the Outer Banks and how you went out of your way to make us feel like we were your only customer. I would strongly recommend you to anyone looking to purchase property in the Outer Banks. But I would especially recommend you to anyone who is purchasing remotely from another state. With only two very short trips to NC from VA we were able to view properties, make offers and negotiate, then complete closing all remotely. Thank you
Lana & Donny Shelley.....July 2017"