Many homeowners are tempted to refinance at interest rates that haven't been this low since the 1970s.
Well, should you? Or shouldn't you?
The general rule of thumb has been to refinance if you can save more than 1% on the rate (with no points or fees other than an appraisal, Title Insurance, and re-establishing an escrow account). You also generally want to be planning on staying in the home for at least another few years, as it will usually take a year or two to recoup those costs. (MORE, if you pay origination fee and junk fees.)
I read an interesting article today by a Dr. Steve Sjuggerud who gives contrarian wealth-building advice.
His recommendation is that "The last person you want to get your interest-rate forecast from is your real estate agent!"
I would agree. Most real estate agents (including myself) simply cannot forecast the interest rate. I highly doubt that Dr. Sjuggerud can forecast the interest rate either (with any specificity), but let's hear what advice he would give you:
- He suggests that mortgage rates could go "much lower".
- He plants seeds that suggest that he thinks you should hold out for 3% or below.
- He recommends refinancing into an Adjustable Rate Mortgage (ARM) and then switching to a 30 year fixed rate once the Fed raises the short term rate.
The only problem with his strategy, (OK, maybe not the only problem, but a real one and a big one for consumers to consider) is that if your property value declines (Sorry, but you have heard that most of the country is in a declining market, right?), you may not be able to refinance into that 30 year fixed rate mortgage...
That's exactly the problem with Arizona's real estate market right now. Property values are downfrom their peak at up to 50% in some markets. No lender will loan you 200% of what your home is worth... so very few owners can take advantage of today's rates.
As "bad" as 5% might seem to Dr. Sjuggerud, many people have 6, 7, 8 & 9% mortgages right now. Many of those people are on ARMs, just like this guys suggests! Those whose property values have declined significantly cannot refinance into today's "terrible" 5% rate.
I'm not saying that rates won't go lower... I hope they do!
But be aware that waiting to refinance as property values decline may not be the smart decision. Getting into an ARM while property values are on the decline might not be the smartest thing to do... even if rates do dip lower.
In some markets, waiting for that 3% rate might just keep you from being able to refinance your home at all. And if the rate does get down that low, why not refinance again? If you can't, you wouldn't have been able to if you had waited... so you don't really lose.
Get a good idea of what the property values are doing in your area, evaluate your current rate and the current options you have to refinance. If the rate isn't low enough for it to make sense... don't do it. If it is, why wait for something that may or may not happen?
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