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It was just over a year ago that interest rates fell sharply, allowing quick-footed mortgage borrowers with good credit an opportunity to cut their mortgage interest rates dramatically. Now, in an amazing development, even those who took advantage of low rates a year ago may have another chance to double-down on their gains. Is there such a thing as refinancing too often?
More and more record lows
What's driving the push for more mortgage refinancing is the huge drop in interest rates recently. Just in the past four months, rates on the 30-year mortgage have dropped nearly three-fourths of a percentage point, to a current average below 4.5%. Shorter 15-year mortgages offer rates below 4%. Both of these represent unprecedented low levels for borrowers, and they're well below what even the most fortunate borrowers would have been able to refinance for in 2008 or 2009.
You'd expect banks to be one of the biggest beneficiaries of the refi activity resulting from these low interest rates. Certainly, some banks are seeing more activity; Fifth Third (Nasdaq: FITB ) expects to see its mortgage activity double in the third quarter compared to levels from earlier this year.
But many banks aren't seeing a huge increase in mortgage refinancing. In their latest quarterly earnings reports, Wells Fargo (NYSE: WFC ) and Bank of America (NYSE: BAC ) actually saw mortgage revenue weakness during the second quarter.
REITs that specialize in mortgage securities have been doing very well in this rate environment. Falling mortgage rates have produced gains for the existing mortgage securities portfolio of Annaly Capital (NYSE: NLY ) , which borrows at ultralow rates and profits from the income spread on the mortgage securities it holds.
Lastly, homebuilders might expect to benefit from lower rates. But homebuilder confidence figures fell to a 17-month low yesterday, and although Toll Brothers (NYSE: TOL ) , KB Home (NYSE: KBH ) , and Hovnanian (NYSE: HOV ) in particular all have seen quarterly losses grow smaller recently, analysts don't expect the red ink at the homebuilders to stop flowing anytime soon. It's becoming increasingly apparent that low rates are not going to solve the housing crisis by themselves.
Looking at the small picture
Even though the big picture may look bleak for the mortgage industry, you may still be able to get another substantial cut in your monthly housing costs if you refinance. Just a single percentage point in savings on a $250,000, 30-year mortgage loan could save you $150 each month in interest for the life of your loan.
The problem, though, is that every time you refinance, you face a bunch of closing costs. In particular:
- Many banks charge mortgage origination fees that can cost you 1% of the amount you borrow.
- Lenders will likely make you go through the process of getting another appraisal for your home and new title insurance, as well as paying for miscellaneous costs like escrow fees.
All told, you can easily end up spending several thousand dollars to refinance your mortgage. Compare that to your $150 monthly savings, and it can take years for you to break even on a refi.
Perhaps more importantly, though, changes in the value of your home can put you in a difficult spot when it's time to refinance. If your equity has dropped below 20%, then your lender will probably force you to purchase money insurance, even when your existing mortgage doesn't have it. If the price has fallen far enough, you may have difficulty getting a loan at all without paying down your principal balance -- something few struggling families are in a position to do with the slow economy.
One intermediate step to consider is asking your lender to reduce the current rate on your mortgage. Much of the time this won't work, especially if the lender has resold your mortgage to Fannie Mae or another secondary-market buyer. However, if your bank has held onto your mortgage, then they probably don't want to lose it, and they have an incentive to give you a rate reduction rather than letting a competitor snare your refi.
Take a look
Refinancing your mortgage can be a long, complicated process. But with rates at historical lows, it can also be a very lucrative one. Make sure to take a look at your existing mortgage, and if you can profitably refinance your home loan to take advantage of low rates, then it'll be worth the hassle.
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Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance.