When are Refinance Rates Low Enough to Consider?
Refinancing your mortgage can provide numerous benefits, but only if you
are able to get a refinance rates that is low enough. Recently
rates have begun to drop as a result of the Federal Reserve purchasing
mortgage-backed securities. Mortgage rates almost immediately began to
fall and have remained quite low, historically low, in fact.
Consequently, many homeowners around the country began to take advantage
of the opportunity to refinance. It is expected that mortgage rates will
begin to creep upwards following the end of this program by the Fed and
could potentially reach an average of around 5.75% by the end of the
year. If so, this will leave homeowners in the position of determining
whether they should attempt to refinance while rates are still low.
If you are considering refinancing, there are a few elements that should
be taken into consideration in order to determine whether now is the
right time for you to refinance. One of the main factors to consider is
the difference that exists between your interest rate and the interest
rate at which you will be able to refinance. The traditional rule of
thumb is for the difference between the two interest rates to be around
2 percentage points, but in some instances it may make more sense to go
ahead and refinance if you can get a new interest rate with a difference
of just one percentage point. Generally, the one percentage point rule
should be considered if you are less concerned with actually paying off
the mortgage and more concerned with lowering your monthly house
payments, such as when you are nearing retirement.
While a low rate is important, it is certainly not the only factor that
should be taken into consideration. You must also take into
consideration how much money it is going to cost you to actually
refinance your mortgage loan versus how much you are going to save each
month by doing so. The general cost of refinancing tends to run between
2.5% and 3.5% of the value of your new loan. For instance, if you are
refinancing a mortgage of $150,000, you can expect to pay around $4,500
in refinance fees. As a borrower you can opt to either roll those fees
into the balance of your mortgage loan or you can pay the out of pocket.
If you think that you may sell your home within the next couple of
years, you may discover that refinancing your home right not might not
actually be that beneficial to you. In an instance like this it is
possible that you could spend more money refinancing than you will be
able to recoup through the savings on the monthly payments. Not sure
which is the best option for you? Try taking the cost of the fees and
then dividing that sum by the monthly savings that you will gain from
the reduced interest rate. If you are going to pay $4,500 in refinance
fees and save $125 per month in mortgage payments, you would need about
18 months before you would begin to actually realize any savings.
Keep in mind that even if you are able to make the numbers add up, you
must still be able to qualify to refinance your mortgage, something that
is not always possible for some homeowners, particularly as requirements
have become more stringent. Loan underwriters are now looking much more
closely at the overall financial picture of borrowers before approving
refinance requests. Many banks now require a credit score of at least
620 to provide approval. In addition, you must also have a sufficient
amount of equity in comparison to the value of the home in order to
qualify for a refinance. If you owe more than 90% of the appraised value
of the home refinancing could prove to be difficult; a situation than
many homeowners around the country have found themselves in as property
values fall and continue to decline as a result of the housing crisis
and increasing foreclosures.
Refinancing does offer the opportunity to save money in interest on your
mortgage and possibly even pay off your mortgage faster, but only if you
are able to get the numbers to add up and can meet the stricter
underwriting guidelines that now apply. Taking the time to assess your
own personal situation before diving into a refinance application will
help you to determine whether now is the right time for you to consider
refinancing your mortgage loan.