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09/27/2016 12:00 AMOne East Haven homeowner had been hesitating to refinance the mortgage on the house she shares with her fiancé despite a recent run of low rates.
“I’m really busy, like most people,” said the homeowner, who asked us to preserve her fiscal anonymity, “so it was just about finding the time to make that phone call.”
But she recently decided to pull the trigger because, she said, “I’ve heard sort of a rumor that when you get close to a presidential election, rates are more likely to increase.”
Asked what he tells his customers when they ask him if rates will rise or fall, David Carswell, the branch manager and mortgage-loan originator at the Guilford Savings Bank in Old Saybrook, laughed and said, “Sometimes I tell them I just don’t have a crystal ball.
“Anybody who says, ‘We see rates going up,’ or, ‘We see rates going down,’ they’re not acting in the best interest of their customer,” Carswell said. “It has to be the decision of the customer if they feel comfortable locking in a rate.”
And sometimes, the rumors get it wrong. Regarding the presidential-election effect, in the previous four presidential-election years, 30-year mortgage rates have declined slightly from August to November, according to freddiemac.com.
In fact, no one can say for sure which way mortgage rates will go (at press time, according to Zillow.com, national rates on 30-year mortgages were on average 3.26 percent, remaining near historic lows.) So the wishy-washy answer to the question whether you should refinance now is “It depends.”
A common rule of thumb is that you should refinance if your current rate is 1 percentage point higher than the offered rate, but that’s really only one of the numbers that will affect your decision.
One of the most important is closing costs, which, according to bankrate.com, currently average $2,313 on new mortgages in Connecticut. These vary, but after you get an estimate from your banker, you need to ask yourself how long it will take you to recoup the cost. None of us has a crystal ball, but if you are likely to move within a few years because of a new job or retirement, refinancing might not pay off.
Tom Lindner, vice-president and community-relations officer at the Essex Savings Bank, pointed out that people who have been making payments for many years on their current mortgage may be paying more per month on principal than on interest, so their saving from refinancing will be less. “It could be in their best interest to put more toward principal every month,” he said.
Since banks adjust certain fees based on perceived risk, one factor affecting closing costs is your credit score. You can check your score free of charge through the main agencies—Experian, Equifax, and TransUnion. If it seems unusually low, you can inquire to see if you’ve been the victim of fraud or simple error.
According to Lindner, closing costs will also vary depending on whether the client is taking cash out on the refinance and on the percentage of equity the homeowner has on the home. So you should consider if you need or will soon need liquid funds for retirement, college, or other costs.
If you are feeling stable and flush and believe you can pay off your principal sooner, you should consider a 15- or 20-year mortgage, which may have a higher monthly payment but will definitely have a lower interest rate.
And if you’re still trying to psych out possible rate changes, you should be aware that they’re driven by huge forces. Neil Irwin, a financial columnist for “The New York Times,” wrote in July that the current low rates are due to “British voters, central banks in Europe and Japan, and a global economy that just can’t get out of first gear.”
According to Carswell, the presidential race will eventually have an effect on rates, after Nov. 7. “Markets start to react to the ideology of whoever’s been elected,” he said. But he didn’t say how they would react.
“If you have special powers to divine which direction rates are going next in this volatile year,” Irwin wrote, “every hedge fund manager on earth would pay handsomely if you would tell them.”
What is ‘Historically Low’?
We frequently hear the term “historically low rates” applied to mortgage rates, though as rates have been steady for five years, some context may help. According to Freddie Mac:
• In January 2010, the average rate for a 30-year, fixed-rate mortgage was 5.03 percent—the last time rates topped 5 percent.
• In May 2008, rates were at 6.04, the last time rates topped 6 percent.
• Rates were at 7 percent in January 2002, In August 2000, they were at 8.3 percent.
• You have to go back to 1992 to find the last rate topping 10 percent–in February rates were at 10.2.
• 1981 was a particularly bad year to buy a home—purchasers in October were faced with an 18.45 percent rate.