Should You Refinance Your Home Loan in 2015?

Economists expect mortgage rates to rise gradually in 2015, perhaps ending the year at or around 5%. It begs the question: Does it make sense to refinance in 2015? Here’s how to decide.

Mortgage rates have been hovering at historical lows for the last few years, partly due to the Federal Reserve’s stimulus measures. But rates are expected to rise gradually between now and the end of 2015.

This creates a dilemma for homeowners who are considering a refinance. The biggest question is: Should I refinance my home loan early in 2015, or can I afford to wait for a while? How do I determine when refinancing works to my advantage?

Here are some important points to consider as you weigh your options.

Freddie Mac: Rates Will Rise Gradually Through 2015

Freddie Mac, the government-controlled corporation that buys and sells mortgage loans, conducts a weekly interest-rate survey that dates back to 1971. Their Primary Mortgage Market Survey (PMMS) offers a weekly snapshot of lending rates in four categories, including the popular 30-year fixed-rate mortgage loan.

According to the PMMS, 30-year mortgage rates have hovered around 4% for the better part of 2014. The question is, what will they do in 2015?

While no one can predict future market conditions with complete accuracy, Freddie Mac’s economists usually get close. In October 2014, they issued the latest version of their Economic and Housing Outlook. It included the following predictions for 30-year mortgage rates:

  • Q1, 2015: 4.3%
  • Q2, 2015: 4.5%
  • Q3, 2015: 4.8%
  • Q4, 2015: 5.1%

Granted, these are only predictions, so you shouldn’t bank on them. What’s important here is the big picture: Most economists and housing analysts expect mortgage rates to rise gradually throughout 2015. This means rates could be higher at the end of 2015 than they are now.

So, back to the question at hand: Should you refinance your home loan in 2015?

When to Refinance: Calculating the ‘Break-Even’ Point

There are steps you can take to measure the savings and benefits of this strategy. As a homeowner, you must calculate your long-term savings and compare them to your upfront costs. If you’ll end up saving more in the long run than the amount you pay in closing costs, it might make sense to refinance your home in 2015.

While there are different reasons to refinance a home, most homeowners do it to secure a lower interest rate and save money going forward. When interest rates rise, it reduces the potential for savings. This is what we could see over the coming months, if Freddie Mac’s forecast proves accurate.

So, how do you know when it makes sense to refinance? For starters, you need to calculate your break-even point, or BEP. This is the point where your savings (resulting from the lower monthly payment) begin to exceed your refinancing costs.

If you sell the home before reaching the BEP, you could lose money on the transaction. If you keep the home beyond the BEP, you’ll end up saving money.

Fortunately, the math is fairly simple. Here’s how to calculate your break-even point: *

  1. Determine your total refinancing costs. Example: $2,000.
  2. Determine how much you’ll save on monthly payments after you refinance. Example: $50 each month.
  3. Divide the total cost by the monthly savings. The answer is the number of months it will take to reach the break-even point.
  4. Example: $2,000 divided by $50 equals 40 months. In this case, you should consider refinancing only if you plan to stay in the home for at least 40 months. That’s how long it would take to reach the break-even point.

* This analysis assumes you are refinancing in order to reduce your monthly payments, which is the most common strategy. It also assumes you are refinancing into a fixed-rate loan.

Here’s the formula again: (Refinancing costs / monthly savings = number of months to reach BEP.)

The key here is to think about your long-term plans. If you think you’ll be moving and selling your home within a few years, it probably doesn’t make sense to refinance in 2015. In this scenario, you probably wouldn’t keep the new loan long enough to recoup the fees paid to secure it.

But if you plan to stay in the home for many years, well beyond the break-even point, you could end up saving a substantial amount over the long term.

Do the necessary research to find out what you would pay, as well as what you would save, by refinancing your home. Once you’ve determined those numbers, it will be easier to decide if refinancing is right for you.