When interest rates hit record-setting lows in 2012, the mortgage industry experienced the peak of a refinance boom. But with rates on the rise in 2013, has the boom gone bust?
Not yet, according to mortgage industry experts.
"It's been stalled, slowed down," says Aaron Vantrojen, state president of the Arizona Association of Mortgage Professionals. "With that being said, there are a ton of people who have haven't refinanced for whatever reason and still can."
Freddie Mac, the government-backed home loan agency, noted in its "2013 First Quarter Refinance Report" that refinances made up approximately 70 to 75 percent of single-family home loan originations in 2012. By the end of 2014, Freddie Mac projects the percentage of refinances will drop to about 50 percent of all loan originations.
But Frank Percival, board president of the Washington Association of Mortgage Professionals, says lingering effects of the refinance boom are still in play for borrowers looking to take out a new home loan.
"It's not over yet," Percival says. "It's more of a bang than a boom. When there's an increasing rate market, it causes some folks debating about refinancing to put the brakes on, and others take a wait-and-see approach."
Are you on the fence about refinancing your home? If so, keep reading to find out why the refinance boom isn't over for everyone.
Reason #1: Interest Rates Are Still Relatively Low
Sure, there's been a lot of news about rates sky-rocketing, but guess what? They're still near historical lows.
In fact, in its "Weekly Primary Mortgage Market Survey," Freddie Mac says the average rate for a 30-year fixed-rate mortgage (FRM) was 4.4 percent for the week of August 15, 2013. That's nearly the identical interest rate for the same time in 2011, when the refinance boom was in high gear.
"In the last 30 years, it's only been in the last four that we have seen rates below 5 percent," Percival says. "It's definitely something people should take advantage of again. If trends follow suit, it might not be another 25 or 30 years before we see rates this low."
Percival suggests that if you are a homeowner with a 30-year fixed-rate mortgage over 5 percent, it might be worth it to investigate whether a refinance in the current market could save you money.
Homeowners may also want to check whether getting an adjustable-rate mortgage (ARM) could save them money, suggests Percival. That's because initial ARM interest rates are significantly lower than the rates for a FRM. For example, the interest rate for a 5/1-year ARM - according toFreddie Mac's weekly report - was 3.23 percent for the week of August 15 (more than 1 percent lower than the 30-year FRM rate we mentioned earlier).
A refinance to this type of ARM would mean a borrower would have a 3.23 percent interest rate for five years before it would change, either up or down, depending on the market.
"If you're not planning on keeping your loan for 30 years, maybe getting a five-year note with an ARM makes sense," Percival says. "The potential savings or lowering a mortgage payment are huge, tremendous."
Reason #2: Property Values Are Increasing
Rising property values, according to experts, could have a positive effect on extending the refinance boom.
"More equity means you have better pricing for a refinance," Percival says.
Equity, as defined by the U.S. Department of Housing and Urban Development's glossary, is "an owner's financial interest in a property, calculated by subtracting the amount still owed on the mortgage loan(s) from the fair market value of the property." And because property values are on the rise, homeowners are starting to find themselves in better positions to refinance.
"A lot depends on the area where you live," Percival says, "but property values are higher than before the bubble burst."
How much have home prices improved? Clear Capital, a provider of data solutions for the real estate industry, released results of its "Home Data Index Market Report" on August 6, 2013, and reported that national home prices increased by 9.3 percent over the last year.
"If your home value is improving, it helps create a bidding war," Percival says. "Your neighbors will get higher-than-asking-price for their homes, and anyone who wants to refinance will go from being below market value to above market value."
Reason #3: Government Refinance Programs Are Still Available - For Now
President Obama gave a speech on August 6, 2013, in Phoenix, where he proposed for the first time to "wind down" Fannie Mae and Freddie Mac in an effort to overhaul the two mortgage-finance companies.
Does that mean the refinance boom is over for people who might consider using government programs to refinance? The answer, according to Percival, is that Fannie Mae and Freddie Mac are currently viable options for homeowners interested in refinancing. But, their future is uncertain, so homeowners should take advantage of these programs now - when they're still available.
So, what programs should homeowners look into?
If your home loan is owned or guaranteed through either Fannie Mae or Freddie Mac, you might be eligible for a refinance from the Home Affordable Refinance Program (HARP). According to Freddie Mac's website, the program is "designed for homeowners who have not been able to refinance due to a decline in the value of their home."
"These programs are crucial," Percival says. "They might be the only refinance opportunity for some people in places where the property values have not yet increased enough (to improve their equity)."
In April of 2013, the Federal Housing Finance Agency (FHFA) announced it had directed Fannie Mae and Freddie Mac to extend HARP by two years, to December 31, 2015.
The Bottom Line
Percival suggests homeowners take a proactive approach when they start thinking about refinancing. He says it makes sense to consult with your mortgage professional on regular basis - once every three to six months or so - to see whether refinancing could help save you money.
"I think people are starting to realize the rates are still pretty good, and we're starting to see clients come back," Percival says. "It's not a boom anymore, but a bang - a good bang that could turn back into a boom."