Contributed by: Nick Defenthaler, CFP®
Over the past month, interest rates on mortgages have declined significantly, posing the question to many clients if it would make sense for them to refinance or potentially accelerate a new home purchase that they may have been considering. Many factors cause mortgage rates to decline, but the most recent cause can primarily be attributed to the UK leaving the European Union, dubbed “Brexit” (click here to read our recent blog on this topic and don’t forget to check out our investment focused webinar as well on 7/28!). Typically, when there is a surprise in the markets or volatility spikes, there is a “flight to safety” by investors and bonds are purchased. Bonds are a bit tricky at times to understand in the sense that when bond prices rise, interest rates usually fall. This “flight to safety” caused the yield on the 10-year Treasury bond to hit an all-time low of 1.36% on July 5th. Mortgage rates typically have a direct correlation to the 10-year Treasury bond yield so when you see those rates decline, usually mortgage rates will follow suit.
Here are some items to consider if you’re thinking of taking advantage of these once again, historically low mortgage rates:
- How long do you plan on staying in your home? There is usually a cost to refinancing and we’ve found that you typically need to live in your home for at least two to three years after the refinance to justify the fees lenders will charge.
- Lowering the payment isn’t always the best option – consider reducing the term on the loan even if it means the payment will slightly increase. Being mortgage free in retirement is a beautiful thing!
- If you have an outstanding second mortgage or home equity line of credit, consider combining them into one loan with a fixed interest rate.
- If you have an adjustable rate mortgage (ARM), now could be a great time to move to a fixed rate to avoid payment fluctuations in the future.
- Consider a modest cash-out refinance to pay down high interest rate loans or use as a low interest rate option to fund higher education costs.
- Don’t make an impulse home purchase just because mortgage rates have declined – the cost of rushing into a major decision like buying a home can cost you far more than the savings you’d see by having a very low mortgage rate.
As with any major financial decision, such as a refinancing or a new home purchase, we encourage all of our clients to reach out to us before making a final decision so we can ensure it is in their best interest for their own personal situation. Please don’t hesitate to reach out if you’d like to talk through your options and see if changing your mortgage rate or term aligns with your overall financial plan and goals.
Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc. Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. . Any opinions are those of Nick Defenthaler and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investments mentioned may not be suitable for all investors. Prior to making an investment decision, please consult with your financial advisor about your individual situation.