Small signs are popping up everywhere that the recession is beginning to fade. From “sold” signs being hammered into front lawns to new businesses appearing in neighborhood retail markets; the Great Recession appears to finally be making its long overdue exit.
While signs of economic recovery is a reason to celebration, consumers who have considered mortgage refinancing should get off the fence. As the economy strengthens, rates may begin to rise, which could hamper your opportunity to take advantage of low rates. Economists insist that you won’t be seeing rates under 5% for a very long time once we finally emerge from recessionary ashes.
Need proof that now is the perfect time to refinance? The 30 year fixed mortgage rate is averaging at 4.58%, a drop from 4.76%--the lowest since December. The 15 year fixed mortgage rates have hit 3.81%, a drop from 3.96%.
According to the Mortgage Bankers Association, mortgage interest rates fell for the fourth consecutive week, prompting a flurry of refinance activity.
Refinance applications increased sharply by 9% last week and have continued to increase 18% over the past month. Patrick Newport, HIS Global Insight economist says, “When rates drop, the refi index tends to respond pretty quickly. Demand for homes is still extremely weak. We’ll see better numbers over the course of the year but they won’t end the year much better than now.”
While home purchases still have legs, the real boom is behind refinances. According to the Mortgage Bankers Association report, refinances were responsible for 63.1% of all mortgages last week.
Refinancing Your Home Will Save You Money--Now
Unless you can plunk down cold, hard cash to own your home outright, you’ll need a mortgage loan to purchase your home. When it comes to mortgage loans, rate means everything. Your rate can dictate how much superfluous cash you will have at the end of the month and is usually the indicator for many borrowers’ household budgets.
Simply put--the lower the rate, the more money you’ll have in your pocket. A lower rate may also allow you afford more home during the initial purchase. Purchasing a $250,000 home with a 4% rate will ultimately be more affordable than purchasing a $200,000 at 7%.
Using a simple mortgage calculator, a $250,000 mortgage loan at 4% will garner a $1,193.54 monthly payment, whereas a $200,000 loan at 7% is $1,330.60. You actually pay more with the lower loan amount.
The same holds true with refinancing. You will save a considerable amount of money in both the long and short run by refinancing. Using a $250,000 loan as an example, compare your payments with a 30-year fixed rate at 6% versus today’s low at 4.760%:
$250,000 at 6% (home value $300,000, property taxes $3,000, insurance $1,500 and annual PMI (personal mortgage insurance) 0.50):
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Monthly Payment
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$1,498.88
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Monthly Property Taxes
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$250.00
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Monthly Insurance
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$125.00
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Loan to Value
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$83.33
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Months with PMI
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36
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Monthly PMI
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$104.17
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Total Monthly Payment
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$1,978.04
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Using the same criteria but applying a rate of 4.760%:
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Monthly Payment
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$1,305.63
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Monthly Property Taxes
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$250.00
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Monthly Insurance
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$125.00
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Loan to Value
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$83.33
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Months with PMI
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30
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Monthly PMI
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$104.17
|
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Total Monthly Payment
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$1,784.79
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Rates Are Low, But How Can I Refinance if My Home Value Has Dropped?
Many borrowers may want to refinance but find that they owe more on their property than it’s currently worth.
Those who purchased their home during the housing boom have had to watch their values erode. Trying to refinance an underwater mortgage (property value is lower than what it’s worth) may appear to be impossible, however borrowers have options.
One viable alternative to conventional mortgage refinance is the Home Affordable Refinance Program (HARP). The program has been recently extended until 2012 and allows the homeowner an opportunity to receive a lower interest rate--even if the mortgage loan is underwater. Of course the homeowner must complete similar steps required for any refinance. Wells Fargo spokeswoman, Vickee Adams says, "It's a new loan so it has to go through the underwriting process, meaning that loan refinance fees will apply."
Fannie Mae’s DuRefiPlus is another alternative for underwater mortgages. This program is open to those who currently hold a Fannie Mae mortgage and are consistent with their mortgage loan payments.
Other refinance areas to consider include the FHA Short Refinance Program and pursuing possibilities within the VA program if you are a veteran.