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Waiting To Refinance: A Dangerous Game?

Have people gotten blase about low mortgage rates?

After rising a bit during August, 30-year mortgage rates recently fell back to their record low of 3.49 percent. There was little fanfare. The U.S. is seeing the lowest mortgage rates since comprehensive records started to be kept in 1971, yet people are taking them in stride. However, if you are still waiting to refinance your mortgage, you may be playing a dangerous game.

The importance of refinancing

Even though mortgage rates have been low for a few years now, there are reasons to believe that many people have not yet maximized their refinancing opportunities.

For one thing, people whose home values fell below their remaining loan balances have generally been prevented from refinancing. However, with the passage of time and some recovery in the housing market, they may now be in a position to refinance.

Another thing is that mortgage rates have fallen so far that even people who have refinanced once may now be able to do it again and save still more money. Given the extraordinary drop in mortgage rates, don't assume that refinancing once is enough.

Just because mortgage rates have been low for a long time now, and the Fed has promised continued intervention in the bond market to hold rates down, you shouldn't have a false sense of security about rates remaining this low indefinitely. There is one thing that could send mortgage rates higher in a hurry: inflation.

Three warning signs for inflation

Mortgage rates generally stay ahead of the prevailing inflation rate -- after all, banks won't want to make a loan if they don't think they'll get more back than the rate of inflation over the term of the loan. Mortgage rates have been able to stay low in recent years because inflation has been very mild. However, there are at least three reasons to suspect this might change:
  1. A warning shot in August. Inflation had been calm so far in 2012, until the Consumer Price Index jumped by 0.6 percent in August. That may just be a one-off reminder of what inflation can do, but even a warning shot can become a self-fulfilling prophecy if it scares manufacturers and retailers into boosting their prices to keep up.
  2. Unrest in the Middle East. Anti-American riots across the Middle East are just the latest reminder of how vulnerable the oil supply is. It doesn't take much of a disruption to send oil prices higher -- especially once speculators start piling on.
  3. Changes in China. Workers in Shanghai recently rioted over labor conditions at a Foxconn factory, which supplies electronics to prominent U.S. firms such as Apple, Dell, and Microsoft. It is a reminder that while China has long been a source of cheap consumer goods for the U.S., its economic development could mean that its workers will start to demand more. Throw in some election-year protectionism on the part of U.S. politicians and you have a formula for higher import prices.

The lack of compelling investment opportunities these days has many people frustrated. However, a compelling opportunity to save money should be greeted with at least as much enthusiasm as an attractive investment -- meaning it may be wise to assess your refinancing options before it is too late.

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