Time to Refinance? Dropping Mortgage Rates Should Make You Consider the Option

With the drop in mortgage rates seen this week, millions of Americans are now asking themselves if it’s finally time to refinance their mortgage. The sudden drop in rates, caused by plunging stocks as fears over Ebola, global economic weaknesses, and Islamic militia groups in the Middle East, prompted investors to pour funds back into US Treasuries. Higher demand, of course, drove government bond prices up, resulting in a drop in yields.

Many bankers, lenders and borrowers had made the assumption that low rates might be a thing of the past, believing rising home loan rates were inevitable as the two-decade average 6 percent came closer. Expectations that the Federal Reserve would start raising its key short-term rate next year had spurred the assumption. Many in the financial industry believed this combination would result in higher mortgage rates as well.

The assumption, however, took at least a temporary detour as stocks plunged early this week. Long-term mortgage interest rates, which track the 10-year Treasury yield, have fallen to two percent. The last time the market has seen such a bargain rate was back in May of 2013.

In addition, the 30 year fixed mortgages have fallen to an average rate below 4 percent to 3.97 percent. This is compared to January of this year when the average was at 4.53 percent. With the rate now below 4 percent, it’s tantalizing to those who have borrowed money at higher rates.

Eager to take advantage of the low rate, many current and would-be homeowners are busy beginning refinancing efforts as they ask lenders for options. However, this bargain rate does come with a few risks. Those refinancing need to look at the numbers beyond just the interest rate. Those who fixate on only the interest rate might find themselves on the losing end when charges and fees are added into the mix. The other risk is an economic downturn which is often closely linked to falling interest rates, could cut into people’s incomes which could then compromise their ability to pay their mortgages no matter how low the rate may be.

Still, the idea of a sub-4 percentage rate is enough to drive a lot of people’s interest in refinancing efforts.

Economist at Bank of America, Michelle Meyer, said, “It gets people excited. It gets mortgage bankers excited. It gets prospective buyers excited.” In an analysis shared by Bank of America, even the tiniest drop in mortgage rates could have profound effects on savings over the long term.

(Photo courtesy of Diana Parkhouse)