Is Now the Time to Refinance?
Mortgage rates continue rising at a much faster than expected pace, and that has put many homeowners into a quandary regarding whether or not to go through with refinance plans. Some lucky homeowners snagged rates as low as 4.65 percent in April and May, as extremely affordable mortgages inspired a tremendous surge in new home loan applications as well as mortgage refinances. But then interest rates on 30-year fixed-rate mortgages jumped nearly a percentage point within just two weeks between May and June, climbing from 5.0 percent to 5.79 percent. Now the big question on everyone’s mind is whether or not it is too late to take advantage of rates and save money by doing a refinance.
Here are some “refi” tips to help you decide:
- First calculate your closing costs with the help of a knowledgeable mortgage broker. Any reputable lender should be able to give you a rather close approximation, despite the fact that fees and costs may vary slightly from the original estimate.
- Be sure to figure in any incidental savings or costs such as tax deductions for mortgage interest or private mortgage insurance payments. If you can recoup the additional expenses within two years, it is probably a good idea to refinance because you’ll break even quickly and start saving money.
- Look for a rate that is at least one and a half to two percentage points lower than the current one. Those now paying seven percent or more are almost guaranteed savings, while homeowners with mortgage rates closer to 6.25 percent should crunch the numbers carefully, because they may be on the borderline.
- For homeowners with higher loan balances of $275,000 or more, the rewards for refinancing will generally be more substantial. Refinancing a small loan amount – of only $100,000, for example – will likely take longer to see the savings, unless the current rate is at least two points higher than the new one.
- Condo owners are in a slightly unique category, and will typically need at least 20-30 percent equity before they can refinance, and lenders may charge higher points and fees. That’s because lenders assume slightly more risk on some condominium loans. Refinancing may still be a savvy move and an easy option, especially if you work with a resourceful mortgage broker experienced in condo loans.
Do the math to see if a refinance makes sense and then trust the numbers, because no two situations are exactly alike. Potential savings will depend on your particular circumstances, the type of loan, and any discounts your broker offers. Although most homeowners use 30-year loans, the current 15-year fixed rate mortgages are one way to go that might have special advantages. Despite a rise from around 4.9 percent to about 5.2 percent they are still quite attractive. For those who can handle the higher monthly payments – since the note is amortized over only 15 years instead of the typical 30-year timeframe – they represent a solid investment. Not only is the interest rate a good deal, but the entire obligation will be paid off in full within only 15 years, saving thousands of dollars that would otherwise be spent servicing a mortgage for twice as many years.
Also study the current mortgage, and check to see if it has a prepayment penalty clause. Even if it does you may still come out ahead by doing a refinance, but you don’t want to trigger a prepayment clause by accident while unaware that one exists, because nobody like unexpected obligations in the middle of a mortgage refinance process.
Ask the lender for a list of necessary application documents and try to get all of those in order before you set out to refinance. That will prevent delays that could result in low rates getting away from you before you have a chance to lock in the loan. Lenders are more scrupulous about underwriting than ever before, and they will pepper you with paperwork requests. Create a file to ensure that tax returns, bank statements, and current loan documents are at your fingertips.
Judging from refinance activity at major banks and mortgage companies, the refi-fever was triggered when rates hit 4.75 percent, and now that they have climbed about a point the flurry of refinance applications has subsided a bit. The Treasury sees signs that the economy is stabilizing, which is encouraging investors to step in and buy American bonds and other monetary instruments. That is the driving rates higher, as demand for USA assets picks up after months of lackluster business and fear of investing in our troubled economy. If the economic recovery continues, the Fed will have no reason to keep rates artificially low and that could send mortgage rates even higher – which is a strong argument for refinancing now before rates move into six or seven percent territory.
Jeffery Hammerberg is Founder and President of Gay Real Estate, Inc. – the nation’s largest group of companies connecting gay & lesbian home buyers and sellers to gay, lesbian and gay friendly real estate agents.
Photo credit: www.GayRealEstate.com.