A silver lining to falling yields: Time to refinance

Falling mortgage rates could mean it's time to consider refinancing—again.

Mortgage rates have continued to decline in recent weeks, spurring mortgage applications. For the week ending Tuesday, the average rate for a conforming 30-year, fixed-rate mortgage was 3.71 percent, down from 3.74 a week ago and 3.96 at the start of the year, according to mortgage data site HSH.com. Rates for a conforming 5/1 adjustable-rate mortgage averaged 3.01 percent, down from 3.17 percent at the beginning of 2015.

"Rates are not only lower than they were expected to be when we closed out 2014, but in recent days have dropped further," said Keith Gumbinger, vice president at HSH.com. The break for homeowners comes from investor concerns about falling oil prices and deflation, he said. That has pushed bond yields lower, allowing mortgage interest rates to slip.

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In early January, 10-year Treasurys fell below 2 percent for the first time since October, hitting the lowest level since May 2013. That same day, according to Zillow Mortgages, average rates for a 30-year mortgage dropped six basis points, to 3.57 percent. Rates have remained low since. On Friday, they reported, the average rate was 3.57 percent, up from 3.54 percent a day earlier.

"From a timing standpoint, now's the time to jump on it," said Greg McBride, chief financial analyst for Bankrate.com. "For anyone who has purchased a home in the past year and a half, these are some of the best rates they've ever seen."

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Many homeowners who wanted to refinance had opportunities to do so in recent years. But plenty still stand to benefit. At least 7.4 million homeowners with 30-year, fixed-rate loans can be refinanced, according to a November report from mortgage analytics firm Black Knight Financial Services. That means they have at least 20 percent equity in their homes, good credit, a non-delinquent loan status and a rate greater than 4.5 percent, high enough to benefit from refinancing.

The pool could be even wider. Fannie Mae and Freddie Mac recently announced new programs allowing borrowers to put as little as 3 percent down. That could open the refinance market for homeowners who don't have much equity and wouldn't previously have been able to refinance, said McBride.

The rule of thumb is that refinancing is worth it if you can drop your rate by at least one percent or otherwise cut a deal that lets you recoup the costs in money saved within a year or two. But there's some flexibility in that assessment. The longer you plan to stay in your home, the less of a rate break there needs to be for you to benefit from refinancing, said Gumbinger. "There's really only one direction for rates to go from here," he said.

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Even if you plan to sell within a few years, refinancing to an adjustable-rate mortgage may offer some savings at current low rates, said McBride. Those loans offer a fixed rate for a set period—usually five, seven or 10 years—and then adjust annually. ARMs can be a risky choice: Rates will almost certainly be higher at that reset than they are now. "If your timetable is accurate, you'll never see that first adjustment," he said.

But be cautious refinancing into a shorter mortgage term, said Mark La Spisa, a certified financial planner and the president of Vermillion Financial Advisors in South Barrington, Ill. "I have never found that that decision is a financial decision," he said. Yes, you'll pay off the loan faster and pay less interest overall, but the advantage of a longer mortgage term is that as inflation goes up, that payment represents a smaller portion of income. With mortgage rates as low as they are, homeowners would get a better return investing that extra cash instead of using it to pay off a sub-4 percent mortgage faster, he said.

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If you do refinance, be smart about how you use those savings. "Refinancing is not something you do in a vacuum," said La Spisa. "What else can you do with that money?" Before splurging, explore how you might be able to use it to improve your finances—for example, by maxing out your 401(k), paying off high-rate credit card debt or putting aside cash for college.