Is Now a Good Time to Refinance?

With mortgage rates at or near all-time lows, and with the expectations of possible lower rates due to QE3, many people are wondering if they should refinance their mortgage.  The mortgage rates tend to be highly correlated to the 10-year treasury yield.  As of this writing, the 10-year treasury is at about 1.64%.  This is near the record low that was reached about six months ago, when the yield went just below the 1.5% mark.

It is impossible to know for sure what happens from here.  The Fed announced QE3 back in September, in which it promised to buy $40 billion per month in mortgage-backed securities.  While it hasn't shown up in the adjusted monetary base yet, this should lower mortgage rates, assuming the Fed ends up following through on what it said.

Of course, there is a possibility that all of this monetary inflation leads to price inflation, which then in turn leads to higher interest rates.  This would eventually be bad for mortgage rates, but it is hard to know if this is right around the corner or if recessionary conditions will keep price inflation relatively low for a few more years.

So here is my suggestion regarding the decision to refinance, assuming that you are in a position to do so.  If, for example, you currently have an interest rate at 5%, and your home equity and credit score are good enough that you can get a 30-year fixed rate mortgage for 3.5% or less, then I would suggest refinancing now.  This is assuming that you plan to not sell your house within the next few years.  There would be enough of a difference in your monthly payments to justify a refinance now.  If rates go down to below 3%, you will not have lost out on that much.  But if rates jump higher sooner than expected, then you will lose out.

On the other hand, if you are right on the margin, it would probably pay to wait.  If you have a current rate of 4% and you can get a new rate at 3.25%, then you can take the chance of waiting for an even lower rate.  If you are wrong and rates go higher, the difference won't be enough that you will be really mad at the lost opportunity.  But if rates go below 3%, then it may be worth it to you at that point to refinance, assuming that your refinancing costs are a low enough percentage as compared to your loan value.

The Federal Reserve is subsidizing the banks and the government, and it is misallocating resources on a grand scale.  But if you can take advantage of low rates on a refinance and save yourself a hundred dollars a month or so, then you should take what you can get.  If you are right on the margin of whether a refinance is worth it, then I suggest you wait.  If you can significantly improve your position now by refinancing, then don't wait.