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Viewing today’s mortgage rates in context
Mortgage rates are near historic lows, but maybe you’ve heard that nagging voice, the one which says “wait just a little longer. Rates can drop lower. Your patience will be rewarded….”
In early July, 30-year fixed refinancing was available in the high 3% range according to Freddie Mac. That’s not far from the record low, just 3.31% in November 2012. It’s financial miles from the 18.63% borrowers faced in October 1981.
And that brings us to a central point. The “nagging voice” needs to see today’s refinance rates in context. In the history of indoor living, financing has rarely been as attractive as it is today. The Freddie Mac average weekly rate between 1971 and the end of 2018 was 8.08%.
Rates are currently less than half that.
Can mortgage refinance rates drop further?
We don’t know what the future will bring. They can rise or fall. The reason to not finance at this time is the belief that rates can go lower. Can this really happen?
There are no brakes on mortgage financing. There is no point beyond which rates cannot go lower. Ten-year financing in Japan is now priced at 0.75%. In France, you can get 20-year fixed rate financing at 1.8%. And yes, it is actually possible to have negative interest rates! With negative interest rates, the bank pays borrowers to borrow. This was the case in Denmark a few years ago.
So back in the USA, rates do have room to move lower.
Why rates might go lower
Is there an objective reason why finance and refinance rates might fall further? There are several.
1. Demand for capital is falling. If demand relative to supply were up, we would see rising rates. That’s just not the case. As recently as November leading real estate voices generally thought mortgage rates this year would top 5%. Instead, lower demand for capital has pushed rates into the high 3s.
2. The Fed could lower bank rates, and mortgage rates would likely follow suit. What’s really happened is that mortgage rates keep falling and the Fed has little choice but to follow.
3. The government wants home sales to rise, which would boost the economy. It’s not happening. As of May, existing home sales were 1.1% lower than last year according to the National Association of Realtors (NAR). Unsold inventory was 2.7% higher than a year earlier. Existing home sales also fell between 2017 and 2018.
Examine your refinancing goals
You only want to refinance your mortgage when you can obtain a material benefit. You should obtain lower monthly payments, a lower rate, or switch from adjustable financing to a fixed rate.
If you think about refinancing rates from a material benefit perspective then there are several measures you might consider.
1. A rate drop. First, should you look for a certain percentage point drop? There used to be a “rule” that borrowers should not refinance unless rates fell 2%. This rule was great for lenders who wanted to keep high-rate mortgages outstanding as long as possible.
Look for rates which are low enough to create a clear advantage when compared with your current financing. There’s no need to reach a mythical rate reduction.
2. Monthly payment. Should you focus on the monthly payment? Yes. A meaningful payment reduction is a wonderful thing. It means real money in your pocket.
But, don’t ignore closing costs. A lower monthly cost and steep closing expenses can be a bad deal. Ask if your monthly savings can repay the cost of refinancing within 36 months. Consider where you might live in a few years.
3. Lifetime interest savings. Lifetime mortgage costs are a useful way to compare financing options. But – in practice – borrowers are unlikely to hold a mortgage for 30 years. According to NAR the typical home is now owned for nine years.
So, should you wait to refinance?
Regardless of what the nagging voice says, when to refinance is up to you. Just keep your eye on the bottom line. Are you getting a material benefit? Will you recover refinancing costs in a reasonable time? How much longer do you expect to stay at the property? Those are the real concerns to have.
If current rates get you to your goal, pull the trigger now.
If you can’t quite benefit yet, wait for lower mortgage rates.