The interest rate is one of the first things people look at when shopping for a refinanced mortgage, because it is the key factor in determining the total cost of borrowing. External factors can cause rates to change quickly, making it important to keep up with current rates when looking to refinance.
What are the benefits of refinancing?
A new mortgage may simply offer a lower interest rate, which could reduce your monthly payment, the term of the mortgage, or both. It can also reduce your risk, especially if you switch from a variable-rate loan to one with a fixed interest rate.
In other cases, refinancing may simply provide a means of consolidating multiple loans, affording the borrower the convenience of making a single payment. Some borrowers refinance to borrow a larger amount than their current mortgage so they can receive the difference in cash, an option is known as cash-out refinancing.
How are mortgage refinance rates determined?
The factors that influence mortgage rates generally relate to either the general economy, individual lender, or the borrower.
General Economy
Mortgage interest rates are particularly sensitive to changes in the economy, as reflected by key statistical indicators such as the consumer price index (CPI), gross domestic product (GDP) and home sales. A weak economy generally lowers mortgage rates, while a strong economy generally raises them. The yield on 10-year treasury bonds is one of the best indicators of the direction of mortgage rates.
Lenders
Individual lenders may also adjust their interest rates based on the price of mortgage-backed securities (MBS). These are mortgages that are packaged by lenders and sold to investors. The price of MBSs will tend to rise and fall based on changes in the economy, particularly the direction of interest rates. Mortgage interest rates move in the opposite direction of changes in MBS prices, rising when prices fall and dropping when prices rise. Mortgage lenders monitor MBS prices closely and adjust their rates accordingly. Such changes will have financial consequences for borrowers with variable-rate mortgages.
Borrowers
The credit profile of individual borrowers has a profound effect on the mortgage rate they can expect to receive. Borrowers may not always get the rate that lenders advertise, as this figure is usually the lowest rate that the lender offers and assumes that the borrower has perfect credit, at least 20% equity and is living in the home that will be refinanced. Borrowers with less than perfect credit or low equity should expect to pay significantly more than the advertised rate.
The type of property being refinanced also can affect the mortgage rate. Refinancing a vacation home or investment property will increase the interest rate in most cases.
What are the current mortgage refinance rates?
A number of sources provide regular updates on current mortgage rates. Freddie Mac publishes average mortgage rates weekly on Thursday mornings, providing borrowers with a good idea of changes in rates. Bear in mind that the primary value of these figures is to determine whether rates are rising or falling in general, and not to inform individual borrowers of the rate they can expect to receive for refinancing their homes.
Adjustable rate mortgages (ARMs) are also an important benchmark for mortgage rates. These mortgages are expressed as X/Y ARMs, where X is the number of years that the initial rate applies and Y is the interval between adjustments after the initial period. Thus, a 5/1 ARM has the same rate for the first five years and then is re-adjusted every year thereafter.
Bankrate publishes a weekly Rate Trend Index that many in the lending industry follow. Most of its experts are expecting mortgage rates to continue to move within a narrow range from week to week, fluctuating only slightly up or down as they have in the latter half of 2019.
Summary
Obtaining reliable sources for current mortgage rates should be one of the first things you do when deciding if you should refinance. Many of the factors that determine interest rate are outside of your control, so it may be in your best interest to wait until rates drop.
