With Rates This Low, Should You Refinance Again?

MainStreet

NEW YORK (MainStreet) – When it comes to mortgage rates, homeowners have been watching just how low they can go and reacting accordingly to historically rock-bottom interest rates.

When rates hit 5%, the rush to refinance was sizeable. When rates fell to 4.5%, the rush to refinance was more substantial. When rates fell to 4%, the rush to refinance was downright staggering. And here we are again, with the average 30-year fixed-rate mortgage falling another rung on the ladder, to 3.87%.

With rates at “an all-time record low,” according to Freddie Mac, the rush to refinance may well reach stampede status, especially with good news on jobs (this morning's announcement that the unemployment rate fell to 8.3%), and more bullish sentiment elsewhere on the economic front.

Refinancing, even if you just did it six or nine months ago, certainly makes plenty of financial sense these days. Freddie Mac is out with a report stating that 49% of homeowners who refinanced their mortgages during the fourth quarter of 2011 reduced the principal balance on their mortgages – the highest percentage in 26 years.

The study also shows that the median interest rate reduction was 1.4%, a 26% savings on mortgage interest rates, and during the first year of the newly refinanced loan the average dollar savings totaled $2,700 on a $200,000 home loan.

[Also see: Lighthouses that became cool homes]

“Savvy homeowners are taking advantage of some of the lowest fixed-rate [mortgages] in more than 60 years to lock in interest savings,” says Frank Nothaft, vice president and chief economist at Freddie Mac.

So even if you just refinanced, the benefits of doing so again may well outweigh standing pat. Let’s look at some at some reasons why it may be a good idea, and why it may not be. Here are the pros:

  • Not only will you reduce your mortgage rate, you’ll reduce the principal balance on your home mortgage.
  • More cash in your wallet allows you to use that money to spend down other debt, pay off your house more quickly, or add to your retirement savings.
  • If you use the extra money to pay down debt, you can improve your credit rating – thus making future loans even more affordable.

And for the contrarians, here are the cons of refinancing again:

  • Every time you refinance you “reset” your mortgage payment clock to 30 years. So it may, depending on your payment volume, take you that much longer to satisfy your loan obligation.
  • Any loan process with a bank or mortgage lender is akin to root canal. Be prepared for more paperwork, more negotiations, and more scrutiny on your credit rating.
  • You’ll be paying fees and closing costs to refinance, and that will cut into your savings.

There’s a reality check involved here, too.

Banks and lenders won’t be offering 3.87% mortgage interest rate deals to just anybody. You’ll need platinum-level credit – think a FICO score of 720 and above. If that’s you, great, you stand the best chance of getting the low rates and saving money on your mortgages. But the further down the FICO scale you slide, the higher your interest will be – and it won’t be 3.87%.

To get a good grip on where you stand refinancing-wise, use BankingMyWay’s Refinance Interest Savings calculator. Even in you refinanced in the last year, the calculator can tell you how much interest you can save if you refinance your mortgage again.

Beyond that, figure out where you are, house-wise. One rule of thumb is that if you plan on moving within five years, refinancing is a bad idea (the real savings are usually found at the back end of the deal, and the front-end savings are chewed up by closing costs and fees).

But if you have good credit and plan on being around a while, there’s no reason you can’t take advantage of record-low mortgage rates.

After all, you just don’t know if you’ll ever see them again.

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