The average rate on a 30 year fixed mortgage has spiked 76 basis points from 3.40% to 4.16% over the last few weeks according to Bankrate.com. And, believe it or not, 76 basis points (about three quarters of one percent) can make a noticeable difference in your new monthly payment if you have not refinanced yet.
For a loan of $417,000, the difference in payments on a 3.4% mortgage versus one at 4.16% is $168 a month or $2020 per year. In high cost areas like California or New York, that difference rises to over $3,000 per year or $250 per month at the conforming limit of $629,000.
So, the question remains: is it too late for you to refinance? Not necessarily, but it does mean that you will need to make sure its right for you. Refinancing is a fairly expensive, and now that rates have gone up, you will save less each and every month after your refinance than you would have. For example, if you had a $300,000 balance at 4.75%, you would have saved $234.50 per month had you refinanced at 3.4% versus $115.35 per month at today's average rate of 4.11%.
That also means you will need a longer payback period to recoup the cost of refinancing. In the above example, you could have recouped $3,000 in closing costs in less than 13 months at the low rate, whereas it will take you 26 months at today's higher rates.
If you are still thinking about it, there are three steps you should take to make sure that a refinance is still in your best interest: estimating your payback period, understanding your timing, and getting the best deal you can.
Estimate Your Payback
To estimate your payback period, you will first need to know how much refinancing will cost you. Talk to one or more lenders to get estimates. Be sure to include all costs, such as origination fees, points, appraisals, tile and escrow services, but exclude funds for your escrow account (taxes and insurance). You will get those back from your current escrow account once your existing loan is paid off. Next, calculate the difference in your monthly payment. Finally, divide the total cost by the difference in monthly payments and you know how long you would need to be in your home (and loan) for the refinance to be of benefit.
Understand Your Timing
Know that you know how long it will take to recover the costs of refinancing, you need to make an honest assessment of how long you will be in your home. Do you think about moving or are you in your forever house? Are you in a stable job or in a more transient profession? If you expect to be in your home longer than the payback period, refinancing makes sense. In general, a short time horizon generally means you should avoid any refinancing packages that have high closing costs, even if it means a accepting higher interest rate. Conversely, if you have a long time horizon, getting the best rate possible will pay off in the long run, even if that means you need to pay more closing costs to get it.
Do Your Homework
While 4.16% is the average rate, not all loans are the same. Loan packages routinely vary by one and a half to two percentage points difference between the most and least cost effective loans being offered to consumers. That means you need to either shop aggressively for your loan or have someone independently verify that you are getting a good deal. In not, you will leave money on the table or risk making a bad decision. Refinancing might make sense with some offers, but not for others.
So what do you do if your payback period is too long? Your best served by waiting to see if lower interest rates return. The last time interest rates jumped this much this fast was late 2010, but they did not keep going up. Instead, they soon resumed their two year slide to all-time lows of the last few months. Nobody knows what will happen this time, but those lows could return.
