If you're going to refinance, do it now, many mortgage experts say. Why? Because interest rates are near historic lows, and while it's possible they could go lower, it's also possible rates will begin creeping up. On Jan. 29, Freddie Mac reported that the average rate for a 30-year fixed mortgage was 3.66 percent. The week before, it was slightly lower at 3.63 percent.
Let's put it this way: If you've been thinking about refinancing, this isn't a bad time to do it, and there are some good reasons to contact your friendly neighborhood mortgage lender now. For instance:
Interest rates are low. As has been true for a while, it's a good time to borrow money. Logic suggests this won't last forever, although nobody is suggesting rates are about to climb soon. At its meeting last month, the Federal Reserve, which regulates the nation's financial institutions, indicated that interest rates will likely remain low for the time being.
"Life doesn't often provide second chances, let alone third or fourth chances. But in the world of mortgages, we have been fortunate to get another shot at all-time low interest rates," says Brian Koss, executive vice president of Mortgage Network, an independent mortgage company headquartered in Danvers, Massachusetts.
Diane George, founder of Vault Realty Group, a brokerage in Oakland, California, agrees. "With rates down to 3.6 percent, it is an excellent time to refinance," she says. "Interest rates haven't been this low since May 2013, which means homebuyers who purchased after that time most likely received interest rates between 4.5 to 4.75 percent."
Even people who refinanced back then might benefit from refinancing now, George says. "If they refinance now, they could lower their rate by 1 percent," she says. "For example: A $450,000 loan with a 4.75 percent interest rate refinances into a 3.6 percent interest rate and will have a savings of an estimated $300 a month."
She adds: "I haven't heard of any lenders telling homebuyers that it's not a good time to refinance. The multiple lenders I work with are all slammed with refinances and home purchases, especially in the Bay Area."
Mortgage insurance has decreased. Earlier this year, the Federal Housing Administration announced it would reduce the mortgage insurance premium rate charged on FHA-backed loans from 1.35 percent to 0.85 percent, which some estimates suggest will result in an average savings of $900 a year for new homebuyers and anyone refinancing a house. It was a decision designed to spur homebuying, but it's good for homeowners who want to refinance as well, says Jim Saxon, president and chief financial officer of Berkshire Hathaway HomeServices in Pittsburgh.
"We are in a mini-refinancing boom, so to speak," Saxon says, referring to both mortgage insurance and interest rates being lowered. "FHA borrowers who refinance have the opportunity to decrease their monthly payments and potentially save on the overall payback of the loan."
Another reason to consider refinancing, especially if you have an FHA loan: You may be able to refinance from an FHA loan to a conventional mortgage and remove your mortgage insurance payments altogether, reducing your monthly payment even more -- if you have enough equity in your home.
Your home's value may be higher. Odds are, it is. Of course, it depends where you live, when you bought your house and how much you bought it for. But ever since the bottom dropped out of the housing market in 2008, amid the recession, and everyone in the country became familiar with the real estate term "underwater," home values have generally made a comeback in recent years.
"If you tried to refinance in the past ... perhaps you're in a better position today. Maybe you didn't have enough equity in your home before, but values have increased, and now you do," Koss says.
Not everyone can or should refinance, however. While the time is right for a lot of homeowners to refinance, you may discover you're missing an invitation to the party. Despite lending restrictions loosening in the last year, your credit score or credit history may scare lenders off. Or, perhaps your finances are in great shape, but it could be you who is frightened -- by the closing costs.
You can expect to typically pay $4,000 on closing costs, according to the online real estate database Zillow.com. Or you can see if your lender will offer a no-closing-cost refinance, which sounds great on the surface, but there is no free lunch. Instead of upfront fees, you'll pay a slightly higher interest rate. Whatever you decide, before paying the closing costs or going for a no-closing-cost refinance, you'll want to do the math -- or ask your banker to do it for you. It may turn out that the closing costs make refinancing cost-prohibitive.
"For instance, if a borrower has a $100,000 loan at 5 percent and refinances at 4 percent with a $5,000 refinancing cost, they will save $20 per monthly payment, but it will take them 20 years to recoup that refinancing cost," Saxon says. "In that situation, it would not be advisable for the borrower to refinance. Basically, you need to analyze the monthly savings as well as the total savings over the life of the loan to determine if refinancing is truly a beneficial move."
Koss concurs. "There are a lot of pieces to the refinancing puzzle," he says. "Just saying anyone with a rate over 4.5 percent should refinance is misleading. It all depends on the situation."
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