As Rates Fall, Refinancing Is Contingent on 2 Points
Mortgage pundits say that 10% is the magic number. Once rates on fixed-rate mortgages fall below that level, consumers start to consider refinancing their mortgages to lock in low rates.
But that hasn’t happened--and may not happen at all unless rates fall a lot further, experts say.
Last week, average rates nationwide on fixed-rate mortgages fell to 9.56%--the lowest level in more than three years, according to the Federal Home Loan Mortgage Corp., also known as Freddie Mac. But few market experts are predicting a big push to refinance.
“If anything, you will see some people refinancing out of adjustable rates into fixed rates,” said Robert Van Order, chief economist with Freddie Mac. “But we expect the impact of this decline to be relatively small.”
Notably, the last time rates were in the 9% range, the mortgage market went wild. And 40% of the activity was from refinancing, Van Order said. But, he added: “In 1986 and 1987, rates were not only low, they were much lower than they had been a few years earlier.”
Consumers then were shedding 13% and 14% mortgages taken out in the early 1980s for loans in the 9% and 10% range.
But now, many homeowners are paying less than 11% interest on their mortgages, which makes refinancing less practical unless rates fall further.
When does it make sense to refinance?
The rule of thumb is that when mortgage rates fall 2 percentage points below what you are currently paying, you should consider a refinance, said Gregg Ritchie, partner at the accounting firm KPMG Peat Marwick.
But how long you plan to stay in your home plays a pivotal role in whether a refinance makes financial sense, he added.
If you plan to stay in the home for 30 years, refinancing could make sense when market rates are merely 1 percentage point below your current rate. But if you plan to sell your home in a year or two, you’d need a difference of 3 percentage points or more before a refinance makes sense.
The reason: Lenders charge a wide variety of up-front fees when you take out a new mortgage loan. Those fees often amount to 2 % to 3% of your mortgage amount, said Sam Lyons, senior vice president of mortgage banking at Great Western Bank.
That means that if you have a $200,000 loan, you could pay $4,000 to $6,000 today for a financial benefit that will come over a period of years.
You need to pencil out how much you’ll save on your monthly payments by refinancing and how long it would take to pay back the refinancing costs. If you plan to stay in the house after the break-even point, a refinance might make sense.
MAIN STORY: A1
The Mortgage Market Fixed-Rate Mortgages in the West Average fixed-rate mortgage, in percent Dec.14: 9.62% Nat’L Avg.: 9.56% Mortgage Rates in December
Dec. 14 Dec. 7 Fixed Variable Fixed Variable United States 9.56% 7.91% 9.81% 8.04% Northeast 9.46 7.69 9.68 7.83 Southeast 9.57 7.86 9.79 8.04 North Central 9.67 7.90 9.94 8.08 Southwest 9.57 7.94 9.75 8.04 West 9.62 8.15 9.91 8.22
Source: Federal Home Loan Mortgage Corp. Southland Home Prices Average Sales Prices By County*
%change %change County Nov.,’89 Oct.,’90 Nov.,’90 from October from Nov.,’89 San Bernardino $139,029 $139,584 141,590 1.4 1.8 Riverside 143,733 150,891 151,412 0.3 5.3 Orange 246,442 236,421 239,671 1.4 -2.7 San Diego 187,586 193,483 189,116 -2.3 0.8 Los Angeles 230,529 226,116 225,600 -0.2 0.2 Area average 202,912 202,913 203,264 0.2 0.2
Sales By County
%change %change County Nov.,’89 Oct.,’90 Nov.,’90 from October from Nov.,’89 San Bernardino 3,347 2,931 2,533 -13.6 -24.3 Riverside 3,662 2,528 2,291 -9.4 -37.4 Orange 4,080 3,582 3,297 -8.0 -19.2 San Diego 3,538 2,611 2,243 -14.1 -36.6 Los Angeles 11,122 9,556 8,359 -12.5 -24.8 Total sales 25,749 21,208 18,723 -11.7 -27.3
*Average prices are calculated after eliminating very high-priced and very low-priced properties. Source: TRW Real Estate Information Service
