Though refinance rates are still competitive, borrower interest seems to be waning.
There's a reason so many homeowners have been eager to refinance their mortgages recently. Refinance rates have dropped substantially, giving borrowers a prime opportunity to slash their monthly mortgage payments. But refinance demand may be waning. Mortgage refinance applications fell 5% for the past week, reports the Mortgage Bankers Association. Granted, at that point, application volume was still 87% higher than it was a year ago. But that year-over-year comparison had been more than 100% just the week prior.
Why the decline in refinance volume?
Refinance rates are usually a bit higher than new purchase mortgage rates. And in the past week or so, they've been slowly but surely ticking upward. That said, the average refinance rate is still below 3% on a national level for a 30-year fixed loan -- and that's an extremely attractive rate to lock in. Still, borrowers could be getting spooked by rising rates and choosing to bide their time in case they come down again.
Another factor at play could be the 0.5% refinancing fee that now applies to mortgages worth $125,000 or more. Called the adverse market fee, it was imposed by Freddie Mac and Fannie Mae and took effect Dec. 1 despite pushback from the housing industry. It still makes a lot of financial sense to refinance even with the fee, but some homeowners may be choosing to either opt out or wait things out.
Should you refinance your mortgage?
Refinancing your mortgage can make a lot of sense today, in spite of slightly higher rates and the adverse market fee. But ultimately, you'll need to ask yourself some questions to see if refinancing makes sense:
- How much can I lower my interest rate? Refinancing generally makes sense if you can lower your interest rate by around 1% or more. If you're already paying a very low rate, refinancing may not be worth it.
- How long do I plan to stay in my home? When you refinance a mortgage, you'll be charged closing costs that equal anywhere from 2% to 5% of your loan on average. You'll need to stay in your home long enough to break even and start enjoying savings. For example, let's say you're able to slash your monthly mortgage payment by $200 by refinancing, but it costs you $6,000 to finalize your loan. In that scenario, it will take 30 months before you break even. If you plan to move in two years, refinancing isn't worth it.
- Am I a strong refinance candidate? Refinancing really only pays if you can snag a competitive rate. If your credit score is weak, you have a lot of existing debt, and you don't have a steady job, you may not get approved. If you do get approved, you may not get the attractive rates you keep reading about.
Ultimately, it's still a pretty good time to refinance despite the fact that rates have begun to climb. If you're going to refinance, shop around with multiple lenders and see what offers they come back with. It's best to compare at least a few options before locking in a new home loan that will be around for many years to come.
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