We have certainly been bombarded with bad economic news for some time. Starting with, real estate woes, then recession, unemployment, bailouts and the like. Bad news of course, erodes consumer’s confidence, and when consumers stop spending the effects are sure to be felt in the stock market. That, coupled with growing problems in Europe and the Middle East, causes people to convert money from risk based investments (stocks, mutual funds etc) to low risk investments (cash and T bills). That spells good news for mortgage rates. High demand for T Bills means the yields are lower. As a result we are looking at amazingly low mortgage rates. The low rates have not (unfortunately) translated into higher demand for housing. Sales of residential real estate are still at a low volume level, and housing prices have not increased, rather are still falling (albeit at a slower pace). All of this points to a great opportunity to refinance. Should you refinance your mortgage now? Here are 7 things to consider.
1. Cost of Refinancing
If the new interest rate can save you the cost of refinancing in one year, you should probably refinance your mortgage. The difference in interest rate is more dramatic on larger loans. For example, a 1% difference in rate on a 100,000 mortgage is $1000 in the first year. A ½ % interest rate difference on a $400,000 mortgage is $2,000.00 in the first year. A mortgage professional can run the numbers for you.
2. Loan to Value
Do you have equity? Falling values have affected all property. You still need to be 80 % or less, loan to value. That would include lines of credit. Sites such as zillow.com and visionappraisal.com are helpful tools to help you determine the value of your home. Also, if you know a local realtor, they have great experience and data, and can be a resource.
3. Debt to Income Ratio
Is your income verifiable and sufficient to cover the underwriting standards? Combined debt to income ratios are very strict. Again, a mortgage professional should be able to walk you thru the guidelines that apply now.
4. Personal Credit
Is your credit still OK? Underwriting is much stricter than it was just a few years ago, and credit scores play a big roll in the pricing of loans. If your credit was dinged, you may be subject to additional fees at closing that are risk based. You can check your scores at annualcreditreport.com. This will give you the scores that the bank will use in the underwriting process. Or, we at Webster can do a pre-approval and check the scores for you and explain the risk pricing that may apply.
5. 15-Year Term
Another thing to consider is to switch to a 15 year loan. Check out our rates here, or Bankrate's here. This would do two things. First the rate is probably a lot lower than your current rate, and second you would be done in 15 years. Your equity grows much faster, and the overall interest paid on the loan is significantly less.
Should you consider an adjustable rate mortgage? Generally I would not recommend these unless you plan to sell or move in the next five to seven years. Many people plan to downsize once the kids are grown, or when the market stabilizes. An adjustable loan would lower your payments for that time period. A 7/1 LIBOR ARM is a 30 year loan with a fixed rate for the first seven years. After that, it adjusts annually. Rates on these loans are currently low.
If you have sufficient equity and wish to consolidate debt, add a pool, or purchase an investment property, or second home, you can get a new loan to include some cash out for these or other reasons. Again these rates are extremely low, so if you have plans, now would be a good time. As you can see, saving money each month is like getting a raise in pay! Today’s rates will not last forever.
There are many factors that can cause rates to increase quickly. There are very few things that could lower rates any further. If there ever was a good time to refinanced, in my mind it is NOW.