Refinancing isn't a no-brainer
Should you try to 'time' the mortgage market?
A perpetual quest to capture the lowest possible interest rate is
another poor reason to refinance, says Ben Borden, owner of Virginia
Mortgage Bankers in Richmond, Va.
"A lot of people get caught up in the lower rate game, and it's a battle for them. Every time rates drop, they try to go and get the lowest rate, and that's a bad reason" to refinance, he says. "There will always be a rate that's lower. It's kind of pointless."
A more vexing question may be whether to refinance now or wait to see whether interest rates will fall further. Borden believes borrowers would be better off to wait since the current interest-rate trend has been downward.
But Stein thinks borrowers should make a decision based on what they stand to gain at the present time since no one knows whether interest rates will be lower, higher or the same six months from now. "No one should make that kind of gamble," he says.
Jumbo loans and mortgage insurance add more twists
Borrowers who have a jumbo mortgage might be able to save more money if they wait to refinance until after the federal government raises the current cap on conforming loan amounts.
A "conforming loan" is smaller than $417,000 (or $625,500 in Alaska and Hawaii) and thus can be sold to Fannie Mae or Freddie Mac, the two government-sponsored enterprises that purchase mortgages from lenders. Larger loans are known as "jumbo mortgages."
A proposal to raise the limit is embedded in the
economic stimulus package that's currently being debated in Congress.
But those who wait to refinance run the risk that Congress won't
raise the limit or that interest rates will rise in the meantime.
If the limit were raised, borrowers who lived in states that have high housing costs, had good credit and were able to avoid a jumbo mortgage due to the higher limit could save as much as $3,000 to $5,000 per year, according to the National Association of Realtors. But if the limit weren't raised, refinancing might be less attractive for those borrowers since interest rates haven't fallen as much on jumbos as they have on conforming loans.
Refinancing also may prove unattractive for homeowners who have mortgage insurance in part because Fannie Mae and Freddie Mac are set to introduce new risk-based pricing schedules that will increase the cost for most borrowers who obtain a conforming loan. Again, those extra fees may wipe out the benefits of a lower interest rate. Read more about risk-based pricing in the story "New Fannie, Freddie fees boost mortgage cost."