Are the historically-low mortgage interest rates causing you to question when - or if - you should refinance?
Unfortunately, the answer to if you should refinance isn't so black and white.
"In today's world with upside-down houses, and values regressing as opposed to progressing, you don’t have that automatic sense of yes it makes sense right now to [refinance] or not," says Brian Dunn, owner of Coastal Realty Services in the South Shore area of Boston.
However, if you're on the fence about refinancing, there are reasons that indicate you should refinance before the summer approaches...
Your Home Value is Likely to Decrease in the Summer
If you're thinking about refinancing, you may want to do it before the summer months - when the real estate market is at its peak and as a result, your home value is likely to decrease.
"In the summertime, there's going to be more homes on the market, and since there are more homes on the market, usually the values drop a little bit because of the fact that there are just more homes for sale," says Cezar Mansour, president of Beach Lending in Redondo Beach, Calif.
And if your home value drops, then refinancing could hurt you instead of help.
That's because a decrease in home value means you'll have less equity in your home when you go to refinance - which can affect the interest rate you receive, says Mansour.
For example, let's say you bought a home for $400,000 and paid down your mortgage so you now owe $300,000. That means you have 25 percent equity in your home. Let's say after the appraisal (which is standard during a refinance), you find out your home value has dropped to $380,000. Your equity has now dropped down to about 21 percent, which means that your loan-to-value ratio has also dropped - a big factor in calculating your mortgage interest rate.
So the time to refinance is now - before home prices start to change.
The Government May Stop Influencing Interest Rates and Backing Programs
In December 2012, the U.S. government announced that it would continue purchasing billions of dollars in mortgage-backed securities as part of an effort to stimulate the economy. By doing this, the government is essentially creating new money to buy loans from banks - and as a result, artificially suppressing interest rates. But this won't last forever.
"At some point the government is going to be peeling back its money-pumping programs, and that's just going to cause rates to climb," says Paul Needels, senior vice president of lending products division at Informa Research Services, a leading financial industry information provider.
But aside from the risk of higher interest rates, another concern is the ending of government-sponsored programs that assist homeowners who are struggling financially. This includes programs like the FHA Streamline Refinance, which helps homeowners who have an FHA-insured loan refinance regardless of home value or equity.
"If you're underwater in your home, the government-sponsored refinance programs are kind of unparalleled, and you need to take advantage of those if you qualify because there's no assurance of how long those are going to continue," Needels says. "The ability to refinance your home with no equity is pretty unprecedented...that's money in the bank."
You Could be Affected by New Escrow Account Rules
If your credit isn't stellar, but you think you could still score a lower interest rate than what you currently have, you might want to refinance before June 1st rolls around. Otherwise, you might have to cough up some big bucks upfront.
That's because having a low credit score is one factor that could make you a high-risk borrower, and when it comes to a mortgage, being "high-risk" could mean that you qualify only for what's called a "subprime loan." These loans have higher-than-usual interest rates to compensate for the risk of a low-credit score borrower defaulting on the loan.
But higher rates aren’t the only punishment for being a high-risk borrower.
In fact, the government currently mandates that property tax and home insurance payments be held in an escrow account for one year for most subprime-mortgage loans. However, on June 1, 2013, homeowners with subprime loans will be required to put five years of property tax and homeowner's insurance costs in an escrow account with their lender, according to the Truth in Lending Act (also known as "Regulation Z") from Consumer Financial Protection Bureau.
So if you have a subprime loan and you're looking to refinance, you might have to come up with more cold, hard cash come June 1, according to Mansour.
Lowering Your Interest Rate by Less Than 1 Percent Can Make a Difference
Low interest rates, which were at an average of 3.67 percent as of April 12, according to the Mortgage Bankers Association (MBA), aren't going to stick around for long. In fact, the MBA predicts that interest rates will reach 4.2 percent for 30-year fixed-rate mortgages by the third quarter of 2013 - and will continue to rise steadily.
If you wait to refinance and rates go up even as little as 0.539 percent (the difference between the April 12 rate and what it's predicted to be by the end of the third-quarter), it could make a big difference in what you're shelling out both monthly and over the life of the loan.
"If you're a half-point above the market, realistically, it probably makes sense for you to be refinancing," Dunn says.
For example, let's say you have a $300,000, 30-year fixed-rate mortgage, and you're unsure about refinancing now or waiting a few months. If you waited to refinance and interest rates did go up to 4.2 percent, here's what the numbers would look like with a 3.67 percent interest rate, and a 4.2 percent interest rate, respectively:
|Interest Rate:||3.67 percent||4.2 percent|
|Total Amount of Payments:||$495,274.85||$528,138.55|
|Total Interest Paid:||$195,274.85||$228,138.55|
So even though 0.53 percent may seem insignificant, it can really make a big difference in your wallet - $91.29 monthly, and over $30,000 in interest over the next 30 years.
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