Are you waiting for the right time to refinance your mortgage? Well, some experts say now might be it.
Why? Because with the presidential election behind us and Barack Obama getting sworn in for another four years, a lot of the uncertainty in the markets could evaporate in 2013.
And that could mean that the economic recovery stabilizes, the unemployment rate goes down, and interest rates rise, says Jim Duffy, a mortgage banker with Cole Taylor Mortgage.
So, before you decide to hold off on refinancing your mortgage, we looked at some reasons that indicate why now is a good time to refinance.
Reason #1: Because Interest Rates are Expected to Rise
Unless you've been shopping property on the moon, you know that mortgage interest rates are at historic lows. But unfortunately, interest rates may be ready to climb again in 2013, according to many market predictions.
"I think most economists would agree that the Fed has been suppressing rates artificially for some time to try to stimulate the economy. But I think interest rates will go up in 2013 and beyond," says Chris L. Boulter, president of Val-Chris Investments, Inc., a California company specializing in residential and commercial loans.
And Boulter may be on to something. In fact, the Mortgage Bankers Association (MBA), the national organization representing the real estate finance industry, forecasts that rates will steadily rise in 2013 and 2014. For instance, by the end of quarter one in 2013, the MBA predicts a rate of 3.9 percent. By quarter four, it will be 4.4 percent. And by the end of 2014, they see the rate at 4.6 percent.
Doesn't sound like much, you say? Okay, let's do some math. We'll see how the rate climbing just 1 percent will change the cost of a $300,000, 30-year fixed-rate mortgage.
|3.4 percent Mortgage||4.4 percent Mortgage|
|Interest Rate:||3.4 percent||4.4 percent|
|Interest Over Life of Loan:||$178,959.73||$240,821.78|
The Bottom Line: That 1 percent difference can really add up. Specifically, the higher rate means you'll be paying $171 more in every monthly payment, along with $61,852 in additional interest over the life of the loan.
Reason #2: Because the Government's Financial Involvement Will Eventually End
Since the recession in 2008, the government has been trying to stimulate the economy with its quantitative expansion policy, which has helped the housing market, stimulated the economy, and kept interest rates at historic lows.
They've done this by buying millions of dollars each month in mortgage-backed securities. You can think of it as the government printing more money to then buy mortgage debt from banks, which ultimately causes interest rates to stay low.
But this won't last forever. In fact, Ben Bernanke, chairman of the Federal Reserve, which sets U.S. monetary policy, said in December 2012 that there will be two factors that mark the end of the government's intervention: the unemployment rate and the inflation rate of the dollar.
When the time comes - and the buying of mortgage-backed securities stops - expect interest rates to rise, says Duffy.
"As soon as the Fed stops buying mortgage-backed securities, a major buyer will be out of the market and rates have nowhere to go but up," says Duffy. "I don't know when that will be. Bernanke says it will be in another year or year and a half. But political winds change fast so rates could go up a lot sooner."
Reason #3: Because Your Rate Could Adjust Up (if You have an ARM)
If you have an adjustable rate mortgage (ARM), now could be a good time to refinance and lock in a low 15 or 30-year fixed rate, before rates do what Boulter, Duffy, and the MBA all think they will do: go up (if you just joined us, see Reasons #1 and #2 above for a discussion on this).
In fact, ARM interest rates fluctuated to some degree every single month in 2011 and 2012, according to interest rate data provided by Informa Research Services, a leading financial information provider to the financial industry. That means, if you had an ARM, you were on a financial roller coaster ride. Not exactly calming.
But if you have a fixed-rate mortgage, rates can go up 100 percent and yours won't budge.
"And with rates at historic lows, I advise anyone who can refinance to a fixed rate now to do it because there is nowhere for rates to go but up, " says Duffy.
Reason #4: Because You Could Afford a Shorter-Term Loan
Think of the interest rate as the price of your loan - because that's how the lender sees it. Banks are loaning you a bunch of money, and just like dog walkers, dry cleaners, and dentists, they expect a fee for their service.
But if you thought your dog walker charged a lot, just wait till you get the bill from your mortgage lender. For example, on a $300,000, 30-year, fixed-rate mortgage with a 3.32 percent rate*, the interest over the life of the loan is $174,182.01. Yes, there's a reason they say that your house is probably the biggest purchase of your lifetime.
But here's the thing: part of the reason the price is so monstrous is because the interest accrues over 30 years. "But if you can qualify for a 15-year mortgage, you can save over half the interest, " says Duffy.
That's because you'll pay off the principal sooner. It's also good to note that 15-year mortgages tend to have a lower interest rate than 30-year mortgages. For example, in December 2012, a 15-year fixed rate was 2.882, significantly lower than the 30-year fixed rate at 3.488, according to Informa.
Just remember, says Duffy, that even though the interest rate and interest paid is less, your monthly payments will be higher than the 30-year mortgage. This is part of paying off the principal in half the time.
Let's check out an example to see the difference. We'll crunch the numbers for two loans at the rates given by Freddie Mac effective December 13, 2012. Both loans will be for $300,000 and fixed-rate, but one will be a 30-year mortgage and the other will be a 15-year mortgage.
|30-Year Mortgage||15-Year Mortgage|
|Interest Rate:||3.32 percent||2.66 percent|
|Interest Over Life of Loan:||$174,182.01||$64,147.57|
The Bottom Line: If you can pay $705 more per month, it might be a good investment since that will save you over $110,000 in interest over the life of the loan. Oh, and you'll own your home 15 years earlier, too. With this plan, 2013 is always looking better than 2012, isn't it?
*The rate quoted for the week of December 13, 2012 by Freddie Mac, an institution established by Congress to provide stability and affordability to the nation's residential mortgage markets.
- interest rates