Still-low mortgage rates aren't the only reason to refinance

Posted by  on Nov 04, 2014

After five consecutive weeks of falls, mortgage rates finally edged up this week. However, they remain at exceptionally low levels. Indeed, on October 31, the most popular was 10 basis points (0.10 percent) below where it was just three weeks ago. In other words, new home loans and mortgage refinances remain very cheap by both recent and historical standards.

Current mortgage rates in detail

By far the most popular form of home-loan borrowing is the 30-year fixed-rate mortgage (FRM), and, according to HSH.com, the average rate for these stood at 4.07 percent with points of 0.14 at the end of last week. That was up from 4.03 percent and 0.11 points the previous week, but way down from the 4.17 percent average for week ending October 10 -- or the recent high of 4.29 percent seen during the week of September 19.

Other average rates also crept up last week, but remained highly affordable. For example, that for 15-year FRMs reached 3.34 percent, up from 3.29 percent seven days earlier. Points for these held steady at 0.11. That for the 1/1 30-year adjustable-rate mortgage (ARM) inched up even more slowly, gaining just 2 basis points to reach 2.60 percent (against 2.58 percent on October 24). Points for these actually fell to 0.15 from 0.16.

Our live database of current mortgage rates can help you find the best mortgage rates in your area.

Refinance with the bigger picture in mind

Probably most people refinance to take advantage of lower rates. They reckon their lower monthly payments will allow them to quickly recoup the up-front costs -- which they can generally incorporate into the loan anyway, if they want -- and see no reason to be paying more than is necessary.

But there are other, more strategic reasons why people want to revisit their home loans:

  1. Be mortgage-free sooner. Of course, you can just increase your monthly payments if you want to pay down your loan sooner. But look at the lower rate you get if you refinance a 30-year FRM into a 15-year mortgage instead: last week, you'd be paying 4.07 percent for the former against 3.34 percent for the latter. Use our mortgage calculators to work out how much that difference would save you over the term of your loan. If you can afford to pay down your loan even more quickly, you could consider an ARM. Although the rates on these mortgages adjust, as the name suggests, you can fix them for an initial period of up to 10 years, which may be long enough to suit your purpose to be mortgage-free sooner.
  2. Stretch your mortgage. This addresses the opposite problem to that first point. If you are struggling to afford your monthly payments, rebooting your mortgage allows you to spread your loan over the next 30 years, which could help you cut your monthly expenses. Generally speaking, the older your existing loan, the greater your monthly savings.
  3. Satisfy your hunger for cash. If you need a lump sum in a hurry, you could release some of your property's equity (the amount by which the market value of your home exceeds the loans that are secured on it) in a "cash-out" refinancing.
  4. Just pay less. If your objective is to pay as little as possible in interest over your lifetime, then refinancing to a lower rate and maybe a shorter term should help you achieve that goal. Again, our mortgage calculators can help you model different scenarios.


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