Time to Refinance?
With both the economy and the stock market in retreat, mortgage rates have been tumbling for weeks in anticipation of a Fed move. Now, with the rate on the average 30-year fixed loan sinking toward 7% for the first time in almost two years, the message to consumers is clear: If you've been looking to refinance your mortgage, now might be the time to pounce (our refinancing worksheet can help with your decision).
Mortgage rates topped out in May at around 8.69%, but have been falling sharply since the end of November. According to Bankrate.com's weekly survey of the largest institutions nationwide, the 30-year rate hit 7.07% this week. And Bankrate's more volatile "overnight" average is even lower than that (click here for a glimpse).
Why the big decline? Credit the slowing economy. While Fed Chairman Alan Greenspan did his best to cool things off last year with a string of short-term rate hikes, most observers have been predicting he would reverse course in 2001. The reason: Recent data show the economy has been slowing faster than anyone expected and many think Greenspan must ease to avoid a recession.
Mortgage rates aren't directly correlated to Fed rate movement, says Neill Fendly, vice president of the National Association of Mortgage Brokers. But they do often march along with Treasury bond yields — especially on the 10-year Treasury note. Yields soared early last year as Fed rates rose. But by the fourth quarter, traders started betting on a slowing economy, and that drove down rates on both Treasurys and mortgages. (For a primer on what moves Treasury rates, click here.)
The question is, will rates fall even further? Some pundits anticipate that Wednesday's action is just the first in a series of Fed rate cuts to come over the next several months. But the truth is, predicting the direction of mortgage rates is a tricky business. Don't forget that the recent slide has already taken into account more than one rate cut, explains Robert Van Order, chief economist at Freddie Mac (FRE). And that means you shouldn't necessarily expect mortgage rates to fall that much further.
"If there are two or three rate moves by the Fed in the first part of this year, you won't see much affect on mortgage rates," predicts Van Order. Indeed, there's even a chance that rates could "bounce off the bottom," says Keith Gumbinger, vice president of HSH Associates, a mortgage information provider. Few think we'll see the 6.6% rates we saw back in 1998.
The bottom line: If you see a good rate, you might want to grab it — especially if you have an adjustable-rate mortgage, or ARM, that's coming due that you'd like to refinance to a fixed-rate mortgage. And if you have a fixed-rate mortgage that's more than 8.5%, you also might consider refinancing, Gumbinger says.
Keep in mind, however, the refinancing calculus involves more than just rates. Getting a new mortgage is hardly free. You need to consider the additional expenditures like application, appraisal and legal fees — not to mention any points you might pay. That's where our "Should You Refinance?" worksheet comes in. It will let you run the numbers on potential mortgage deals to see if the new rate really adds up to savings. You also might want to check out our "Points or No Points" worksheet to evaluate whether it's better to pay your fees upfront or spread them out over the life of the loan.
Where can you find the best rate? Online, of course. Online mortgage brokers such as iOwn.com, Lending Tree and eLoan let you evaluate dozens of lenders with the click of the mouse. Each amounts to a great research tool — even if you don't decide to purchase a mortgage online. Another good place to research rates is at Bankrate.com, which allows you to screen for the best rates by state
