Homeowners who missed the last refinancing boom have been given another chance.
According to a weekly survey by Freddie Mac, average interest rates for 30-year fixed mortgages fell last week to their lowest level in over a year and a half last week. Interest rates are the lowest the country has seen since mid-2013, and remain close to their lowest level in 50 years.
Not many experts expect rates to stay low, however.
According to the Mortgage Bankers Association, 30-year fixed mortgage rates are likely to rise as early as 2015’s first quarter; and should end the year at 5%. The mortgage industry trade group also predicts rates at 5.4% by 2016.
With current mortgage rates low (but expected to rise), U.S. homeowners are submitting applications to refinance by the tens of thousands.
Refinancing can be a great way to save money, but there are times a homeowner should choose to say “no”. For example, because there are costs associated with refinancing, sometimes, refinancing to a lower interest rate mortgage can be more expensive than keeping your current one.
So, how should you determine whether refinancing is right for you?
First, you will want to understand how refinancing works. Then, you should consider your current financial situation and what you plan to accomplish with a refinance.
The mechanics of a refinance are basic — you give a new mortgage which pays your original mortgage in full, leaving you with just the “new” mortgage(s) on your home.
The interest rate of your new loan; and the term of your new loan may be different for your original, but the property securing the loan is the same.
Many people find it simpler to refinance a home than to get the loan needed at the time of purchase. This is because refinance transactions typically require less paperwork and documentation as compared to a purchase loan.
Refinance mortgage rates may be higher or lower than rates available on a home purchase.
Low mortgage rates are an excellent reason to refinance a home; however, for today’s homeowners, there are other considerations as well.
In general, homeowners may find it challenging to refinance without sufficient home equity. In mortgage terms, “sufficient home equity” can be defined as have a loan-to-value on your home of 80 percent or better.
However, there are a number of refinance programs available to homeowners with less than 20% equity. Two popular programs are the VA Streamline Refinance and the FHA Streamline Refinance.
Available to homeowners with existing VA and FHA loans, respectively, these two streamlined refinance plans ignore a homeowner’s home equity percentage and allow refinancing based on recent payment history. Homeowners nearly always qualify for the VA Streamline Refinance and FHA Streamline Refinance if when they’re current with their loans and the refinance shows benefit.
For homeowners with conventional loans backed by Fannie Mae and Freddie Mac, two options exist. The first option is the Home Affordable Refinance Program (HARP) which allows for unlimited loan-to-value; and the 97% LTV program for homeowners with at least three percent equity in their homes.
The 97% mortgage program is available to all homeowners who meet the program criteria; and can be used by homeowners with existing FHA mortgages to “cancel FHA MIP“.
When you can lower your current interest rate, it may be worthwhile to refinance your home.
Lower mortgage rates can mean lower payments but, for many homeowners, the deciding factor in refinancing to lower rates is going to be some variation of “how long it will take recoup your loan closing costs?” For example, if your refinance carries total closing costs of $3,000, and you save $100 monthly with the transaction, the general thinking is that you should not refinance unless you’ll be in your home for at least 30 months.
However, there are other considerations with a refinance including getting “cash out”, and the value of having access to extra money today.
Choosing a lower mortgage rate can be a good reason to refinance — it just shouldn’t be the only reason.
Closing costs are an important consideration when deciding whether to refinance and there are three ways to handle your costs.
The first way to handle your costs is to pay the minimum at closing, in cash or as part of your loan balance. For example, if your closing costs total $2,500, you can opt to bring $2,500 to your closing in the form of a check; or you can add $2,500 to your loan balance.
In both instances, you are paying closing costs from your own money — either as cash or in the form of home equity.
The second way to handle your costs is to elect to pay discount points, which lowers your mortgage rate below “standard” market rates, in cash or as part of your loan balance. 1 discount point costs 1% of your loan size such that a $250,000 loan with 1 point will carry an additional loan fee of $2,500.
In general, paying 1 point will lower your mortgage rate 25 basis points (0.25%). This will result in lower monthly payments and, eventually, you will save more on your payments than you paid in points at your closing. Recouping your discount points could take as few as 12 months or as many as 60.
The third way to handle your closing costs is via a zero-closing cost mortgage. With a zero-closing cost, you willingly accept a slightly higher mortgage rate from your lender in exchange for having all of your loan closing costs paid on your behalf. In general, on a $250,000 loan, a mortgage rate increase of 25 basis points (0.25%) will convert your loan into a zero-closing cost mortgage.
Zero-closing costs mortgages can be sensible for homeowners whom expect to move from their homes in the next few years; or whom expect to refinance within the next 24 months.
For homeowners planning to make their next refinance last 30 years, zero-closing cost loans can be the most expensive route. Mortgage calculators can be a helpful tool to determine which program works best.
Another consideration for refinancing households is whether you want to extend or reduce the number of years until your mortgage is paid in full.
For homeowners with an existing 30-year mortgage, refinancing to a new 30-year mortgage may yield tremendous monthly savings. However, the new loan will reset your years of indebtedness to thirty. Long-term, you’ll still save money, but you’ll be paying on your loan for more years overall.
Not wanting to “start over” is one reason why the 15-year mortgage is a popular refinance choice. 15-year mortgage offer low mortgage rates and fewer years to repay in full. It should be noted that payments on a 15-year mortgage are higher as compared to 30-year loans, but over the life of the loan, today’s 15-year mortgages save homeowners 65% in mortgage interest costs.
With its huge long-term savings, the 15-year mortgage can be an excellent way to save for homeowners to plan to retirement or to save for college tuition costs.
Deciding whether to refinance is a personal decision. Consider how long you’ll be in your home, how much you’ll save each month, and how long it will take to recoup your costs. Thankfully, with mortgage rates low, the market is ripe for homeowners to take action.
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