If you’ve been procrastinating about refinancing your mortgage, you could be in for a surprise. After flirting with near historic lows in late April, and hovering around 5% in May, in the first half of June, average rates on 30 year fixed mortgages have now risen to 5.6% with the trend decidedly up.
What does this mean to you? Refinancing can still make sense, if you have an adjustable rate mortgage and want to lock in long term savings since rates are anticipated to keep rising. Getting a new mortgage is also a practical choice if your current fixed rate loan is at 6.6% or better. Mortgage experts contend that it takes at least a full point of difference between your current rate and your new rate to make refinancing worth your while, given the costs and time involved in securing a new home loan.
Mortgage modification remains a viable option. Since most loan mods are changes in the interest only, the sooner you lock in a long term deal the better it will be for you. Costs are substantially lower for a loan modification compared to a refinance, especially if you do it yourself. Remember that hardship is a key element in requesting an interest rate reduction. Help from both the private and public sector abounds.
What is leading to this rise in rates? Several factors are at work. Most investors believe that the stock market bottomed out in early March when the Dow Jones Industrial Average dipped below 7,000. It’s been consistently over 8,000 for the past six weeks, closing over 8,500 today despite a more than 100 point loss. With investors feeling more confident, they are more inclined to gamble in stocks than put their money into government backed mortgage securities. Higher interest rates also reflect the fact that the government is borrowing huge amounts of money to shore up the economy. The Federal Reserve could buy government debt to lower the interest rate, but that action would lead to worries that the Obama administration is trying to spend its way out of the recession by printing money. Increasing interest rates seem likely.
The lesson here is clear. A half point difference in a mortgage interest rate can easily mean $200 more or less a month in your pocket. If you are hoping to reduce your mortgage payments, the time to act is now.