According to Freddie Mac, the average rate on a 30-year fixed mortgage is currently 3.41%, while the average rate on a 15-year fixed mortgage is 2.74%. Both of these numbers are close to all-time lows, after the ‘Brexit’ vote caused a flight to U.S. Treasury bonds in the face of global uncertainty. When investors flock to bonds, interest rates go down, and potential borrowers can benefit.
For many individuals who own their homes and have a mortgage, now may be an opportune time to see if refinancing makes sense. In addition to low rates, home prices in most areas have recovered substantially from the market lows of 2008-2009, allowing borrowers who may have been underwater for several years to be sitting with positive equity again. Having equity is important, as a lack of equity makes it near impossible to refinance a mortgage without paying down the principal value.
A word of caution should go out to those who are thinking about tapping into their home equity just because the money is ‘cheap’. We’ve started to hear commercials again that are encouraging homeowners to pull equity out of their house in order to take a trip, or buy a car. More often than not this is ill-advised. There are a few instances where increasing one’s mortgage balance in order to pull equity out of a home may make sense. The most common instance is doing so in order to pay off higher interest debt (i.e. use a 3.5% interest rate on your mortgage to extinguish credit card debt at 15-20%).
Many homeowners have already taken the opportunity to refinance their mortgage over the past couple of years, as interest rates have been near generational lows for quite some time. For these homeowners, it may not make sense to refinance again unless the rate reduction is 1% or more, due to closing costs. However, I’ve spoken with many people who have been paying in the 4.5%-5.0% range and simply haven’t refinanced because the savings wouldn’t be that substantial. While every situation is different, now may be a good time for these homeowners to run the numbers.
All comments and suggestions are welcome.
Christopher W. Frayne, CFA®, CFP®