It’s a good time to check the rate on your home mortgage, because you might save money by refinancing. For that, American homeowners can thank British voters, central banks in Europe and Japan, and a global economy that just can’t get out of first gear.
The average interest rate on a 30-year fixed-rate mortgage was 3.49 percent Monday, which is down from 4.2 percent a year ago and 3.9 percent at the start of 2016 (the rates on 15-year fixed-rate mortgages and various forms of adjustable-rate loans are also down). This movement is being driven by shifts in the global bond markets.
There is even reason to think mortgage rates could fall further in the weeks ahead as banks start to pass more of the savings from low rates in the bond market through to customers — though would-be refinancers would have to be willing to bet that global markets won’t reverse themselves in the interim. Bond yields rose Tuesday, which suggests that some reversal may have already begun.
Using the rule of thumb that refinancing frequently makes sense when rates have fallen by a full percentage point, people who took out loans at the prevailing rate at various points in late 2013 and the first part of 2014 might see favorable economics for refinancing, as will those whose loan was first made anytime before mid-2010.
People with narrower gaps between their interest rate and those that prevail now might also consider refinancing. That makes sense particularly if they expect to remain in their current home for many years, thus allowing time for even modest monthly savings to accumulate enough to justify the one-time expenses tied to refinancing a loan.
Lower rates can make this a good time to refinance for people who want a different type of mortgage, like moving from a 30-year loan to a 15-year one to pay off the home faster.
For a first cut at exploring whether refinancing might make sense in your situation, use any of several online calculators, such as this one created by the housing site Zillow. A mortgage broker or banker can help determine the exact rate, eligibility and fees that would apply.
What no one can know is whether rates will pop back up or continue to drop. As much as mortgage rates have declined in 2016, and especially since Britain voted to leave the European Union on June 23, they actually haven’t declined as much as the long-term interest rates that prevail on the global bond market.
From the end of last year until Monday’s close, the interest rate on 10-year Treasury bonds had fallen 0.84 percentage points, while the average rate on 30-year fixed-rate mortgages was down only 0.41.
Essentially, banks have been able to keep much of the savings of falling global rates for themselves — the gap between those numbers, reflecting strong demand for loans and limited competition.
That gap between long-term rates on global markets and what banks charge their customers for a mortgage has spiked repeatedly in the last few years, as it has in the last month, but those spikes have inevitably been short-lived. Assuming the pattern holds, it would mean that mortgage rates will fall further in coming weeks, as competitive pressure takes hold and more banks pass along the low interest rates prevailing on the bond market to their customers.
That said, there’s no guarantee that will happen. Yes, there’s reason to think that banks will lower the premium they are charging for mortgages. But with Treasury yields at record-low levels, the same technical forces that have driven rates downward in the last few months could reverse. That means that even small improvements in the global economic outlook could cause a rapid rise in rates.
So if refinancing looks desirable now, you might save a little more on mortgage interest if you wait. But if you wait, your lucrative refinancing opportunity could evaporate. And if you have special powers to divine which direction rates are going next in this volatile year, every hedge fund manager on earth would pay handsomely if you would tell them.
Neil Irwin, New York Times
Run the numbers: Refinance calculator
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