Is Now the Time to Refinance?

It doesn’t take much to chase borrowers from the mortgage market. A tiny bump in loan rates caused mortgage applications to drop 14.4% in the Mortgage Bankers Association’s recent survey, for the week ending Nov.12.

A big part of the drop was a 16.5% decrease in refinancings, which account for about 80% of mortgage applications.

The MBA’s survey showed rates on 30-year fixed-rate mortgages rising to 4.46% from 4.28% the week before, a small increase, but clearly enough to give some homeowners second thoughts about refinancing. Many probably hope that rates will fall back, making a wait worthwhile. And of course, it’s easier to postpone a refinancing than to push through a loan application for a home purchase.

But will a wait pay off? It’s hard to know. A spate of good economic news – or, more correctly, less bad economic news – pushed the rates up. And the economy has enough problems that bad news could easily follow, driving rates down.

But waiting to refinance does have costs that should be weighed against the potential benefits.

Homeowners refinance when rates fall enough that a new loan will reduce monthly payments enough to offset refinancing costs. If you keep the mortgage past that break-even point, you'll come out ahead.

Postponing a refinancing in hopes of getting a lower rate will force you to pay the older, higher rate longer. If it is significantly higher, holding out for a minor drop in the new rate may not pay off.

Fortunately, tools like BankingMyWay's Refinance Breakeven Calculator can help make sense of it all.

But the loan rate is not the only factor to consider. The homeowner also has three ways of paying the refinancing costs, which include points, application and lawyer’s fees and title insurance often totaling thousands of dollars.

You can pay the costs at closing with money from savings or other investments, you can borrow the money by adding the costs to the new loan, or you can opt for a “no-cost” mortgage that charges a higher rate, typically about half a percentage point more, according to HSH Associates, the mortgage-information firm.

Evaluating these three options can be maddening, especially if you need to consider three different loans – the one you have, one you could get right now, one you hope to get if rates pull back.

To make sense of it all, HSH has a new “Tri-Refi Calculator”. Generally, it shows that if you keep the new mortgage for many years, you’re likely to do best paying the closing costs up front, since the other two options would increase your interest costs. But if you were to sell the home within just a few years, the “low cash-out” or “no-cost” options might be better.

But maybe not. It really depends on the factors you key into the calculator, such as loan amounts, interest rates, closing costs and the number of years you expect to have the loan.

At first glance, the calculator is a bit intimidating, with lots of blanks to fill in. But doing it right can be worth the effort, possibly saving you thousands of dollars during the next few years.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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