Investors are refinancing mortgages at record rates, but is that the best of financial planning strategies?
Mortgage refinancing is on the increase, according to data released today by the Mortgage Bankers Association, but experts warn that refinancing is not always the best of financial planning strategies – even with record low interest rates.
In the week ending June 1, refinancing activity reached its highest level since February 2012, and refinancing accounted for 78 percent of total mortgage applications, according to the Mortgage Bankers Association or MBA. (Millionaire Corner research shows that few Millionaires currently believe buying a home is the best of financial strategies.)
Over the same period, interest rates for 30-year, fixed-rate mortgages with balances less than $417,500 averaged 3.87 percent, the lowest rate on record, the MBA reported. Rates for 30-year, fixed-rate mortgages for loans with jumbo balances also reached a new low of 4.13 percent. FHA-backed, 30-year, fixed-rate mortgages remained at their historic low of 3.7 percent. Average rates for 15-year, fixed rate mortgages dropped to 3.2 percent, another record low.
The historic low rates are tempting homeowners to refinance their mortgages, but the move doesn’t always make financial sense, according to the website ERATE, an online source of mortgage rates. Refinancing might be a good idea if a homeowner needs to tap into home equity, but he or she should have a sound reason for doing so, according to ERATE.
“Your home is not a cash register and should never be treated as such, particularly for frivolous consumer purchases,” according to ERATE. A refinance may also make sense for homeowners who otherwise lack the resources to pay for a balloon payment, or who have an adjustable rate mortgage and feel nervous about the uncertainty of a movable rate.
Refinancing may not be the best of financial strategies for homeowners who have held their existing mortgage for a long time, such as 10 to 20 years into a 30-year mortgage, according to ERATE. “If you opted to refinance now to obtain a lower rate, but would re-extend the term, it would likely cost you more in the long run.”
The potential costs or savings of refinancing can be calculated with such online tools as the Bankrate Mortgage Refinance Break-Even Calculator. The tool evaluates such factors as a homeowner’s current interest rate, the potential new rate, closing costs and how long a homeowner plans to stay in his or her home.
Additionally, says ERATE, refinancing may not be optimal among financial planning strategies for homeowners with a recent hit to their credit score, such as a missed auto payment or bankruptcy, or homeowners who’ve maxed out on home equity loans and lines of credit.