Mortgage Rates Highest in a Year: When It's Not a Good Idea to Refinance

May 30, 2013 — -- intro: With fixed mortgage rates the highest in a year, homeowners may have missed the boat on the record-low mortgage rates of the last year, but there's no need to panic if you're still considering refinancing, said Frank Nothaft, vice president and chief economist with Freddie Mac.

"Even if rates are up half a percentage point, they are still unbelievably low," Nothaft said.

Rates are rising, says the Mortgage Bankers Association, "in response to stronger economic data and an increasing chance that the [Federal Reserve] may soon begin to taper their asset purchases." The Fed for more than a year has been buying bonds to drive down interest rates and spur the economy.

As mortgage rates rise, it's still hard to believe there were double digit 30-year mortgage rates through much of the 1980s, including 18.63 percent in Oct. 9, 1981. The lowest 30-year fixed-rate was 3.31 percent on Nov. 21, 2012.

Freddie Mac reported Thursday that the 30-year fixed-rate mortgage averaged 3.81 percent during the week that ended May 30, up nearly half a percentage point since the beginning of May when it averaged 3.35 percent. Last week, it averaged 3.59 percent and last year at this time it averaged 3.75 percent.

The 15-year rate averaged 2.98 percent, up from 2.77 percent the previous week and 2.97 percent a year ago.

Meanwhile, home prices rose the most since 2006, according to housing data released by S&P/Case-Shiller this week.

Nothaft said he had expected mortgage rates to move higher starting in the middle of this year or second half of 2013.

"I think the low rates that we had seen over the last year -- I think that will be history," he said.

He said he expects fixed mortgage rates to "hover" around 4 percent for the year. In 2014, he expects rates to be above 4 percent.

"They bounce around every single day. It's possible there will be a day this year they hit 4 percent. But on average, I think they'll hover around where they are," he said.

A drop of one percentage point used to be the rule of thumb in determining if a homeowner should refinance their mortgage, but Erin Lantz, director of Zillow Mortgage Marketplace, said the rules have changed.

"In today's low rate environment, what you want to think about are monthly potential savings," Lantz said, including the costs to refinance and how long are you planning to stay in the home.

Zillow has a refinancing breakeven calculator on its website and released a redesigned version of its mobile app on Thursday that shows government-backed refinance programs for underwater borrowers.

When asked if he had advice for homeowners considering refinancing their homes, Nothaft said if refinancing is financially attractive to homeowners now, they should submit an application to do so.

"If you're on the fence and considering refinancing, I don't think there's reason for you to wait further," he said.

Nothaft said consumers must calculate how they would feel if experts like him are wrong and rates do indeed go up half a percentage point.

"It's very difficult to outguess the unknown future. If it's attractive today, don't put it off, get it done now," he said.

Freddie Mac cautions that average fees and points reflect the total upfront cost of obtaining a mortgage, plus borrowers may pay closing costs not reflected in their survey.

The Federal Reserve offers homeowners tips about when it is not a good idea to refinance.

These include:

quicklist:title: You've had your mortgage for a long time.text:"By refinancing late in your mortgage, you will restart the amortization process, and most of your monthly payment will be credited to paying interest again and not to building equity," the Fed says.

quicklist:title: Your current mortgage has a prepayment penalty.text:

Paying a prepayment penalty, which some lenders charge if you pay your mortgage loan early, will increase the time it will take to break even, when you account for the costs of refinancing and the monthly savings you expect to gain.

quicklist:title: You plan to move from your home in the next year or two.text: The monthly savings gained from lower monthly payments may not exceed the costs of refinancing.