One More Chance to Refinance in 2015?

January 4, 2015

IS NOW A GOOD TIME TO REFINANCE?

2015 shirtHomeowners who missed the last refinancing boom have been given another chance.

According to a weekly survey by Freddie Mac, average interest rates for 30-year fixed mortgages fell last week to their lowest level in over a year and a half last week. Interest rates are the lowest the country has seen since mid-2013, and remain close to their lowest level in 50 years.

Not many experts expect rates to stay low, however.

According to the Mortgage Bankers Association, 30-year fixed mortgage rates are likely to rise as early as 2015’s first quarter; and should end the year at 5%. The mortgage industry trade group also predicts rates at 5.4% by 2016.

With current mortgage rates low (but expected to rise), U.S. homeowners are submitting applications to refinance by the tens of thousands.

Refinancing can be a great way to save money, but there are times a homeowner should choose to say “no”. For example, because there are costs associated with refinancing, sometimes, refinancing to a lower interest rate mortgage can be more expensive than keeping your current one.

So, how should you determine whether refinancing is right for you?

First, you will want to understand how refinancing works. Then, you should consider your current financial situation and what you plan to accomplish with a refinance.

Click to get today’s interest rates.

HOW REFINANCING WORKS

The mechanics of a refinance are basic — you give a new mortgage which pays your original mortgage in full, leaving you with just the “new” mortgage(s) on your home.

The interest rate of your new loan; and the term of your new loan may be different for your original, but the property securing the loan is the same.

Many people find it simpler to refinance a home than to get the loan needed at the time of purchase. This is because refinance transactions typically require less paperwork and documentation as compared to a purchase loan.

Refinance mortgage rates may be higher or lower than rates available on a home purchase.

Click to get today’s interest rates.

FACTORS TO CONSIDER PRIOR TO REFINANCING

Low mortgage rates are an excellent reason to refinance a home; however, for today’s homeowners, there are other considerations as well.

How Much Equity Do You Have In Your Home?

In general, homeowners may find it challenging to refinance without sufficient home equity. In mortgage terms, “sufficient home equity” can be defined as have a loan-to-value on your home of 80 percent or better.

However, there are a number of refinance programs available to homeowners with less than 20% equity. Two popular programs are the VA Streamline Refinance and the FHA Streamline Refinance.

Available to homeowners with existing VA and FHA loans, respectively, these two streamlined refinance plans ignore a homeowner’s home equity percentage and allow refinancing based on recent payment history. Homeowners nearly always qualify for the VA or FHA Streamline Refinance if when they’re current with their loans and the refinance shows benefit.

For homeowners with conventional loans backed by Fannie Mae and Freddie Mac, two options exist. The first option is the Home Affordable Refinance Program (HARP) which allows for unlimited loan-to-value; and the 97% LTV program for homeowners with at least three percent equity in their homes.

The 97% mortgage program is available to all homeowners who meet the program criteria; and can be used by homeowners with existing FHA mortgages to “cancel FHA MIP”.

What Is Your Current Interest Rate?

When you can lower your current interest rate, it may be worthwhile to refinance your home.

Lower mortgage rates can mean lower payments but, for many homeowners, the deciding factor in refinancing to lower rates is going to be some variation of “how long it will take recoup your loan closing costs?” For example, if your refinance carries total closing costs of $3,000, and you save $100 monthly with the transaction, the general thinking is that you should not refinance unless you’ll be in your home for at least 30 months.

However, there are other considerations with a refinance including getting “cash out”, and the value of having access to extra money today.

Choosing a lower mortgage rate can be a good reason to refinance — it just shouldn’t be the only reason.

Click to get today’s interest rates.

What Are The Closing Costs To Refinance?

Closing costs are an important consideration when deciding whether to refinance and there are three ways to handle your costs.

The first way to handle your costs is to pay the minimum at closing, in cash or as part of your loan balance. For example, if your closing costs total $2,500, you can opt to bring $2,500 to your closing in the form of a check; or you can add $2,500 to your loan balance.

In both instances, you are paying closing costs from your own money — either as cash or in the form of home equity.

The second way to handle your costs is to elect to pay discount points, which lowers your mortgage rate below “standard” market rates, in cash or as part of your loan balance. 1 discount point costs 1% of your loan size such that a $250,000 loan with 1 point will carry an additional loan fee of $2,500.

In general, paying 1 point will lower your mortgage rate 25 basis points (0.25%). This will result in lower monthly payments and, eventually, you will save more on your payments than you paid in points at your closing. Recouping your discount points could take as few as 12 months or as many as 60.

The third way to handle your closing costs is via a zero-closing cost mortgage. With a zero-closing cost, you willingly accept a slightly higher mortgage rate from your lender in exchange for having all of your loan closing costs paid on your behalf. In general, on a $250,000 loan, a mortgage rate increase of 25 basis points (0.25%) will convert your loan into a zero-closing cost mortgage.

Zero-closing costs mortgages can be sensible for homeowners whom expect to move from their homes in the next few years; or whom expect to refinance within the next 24 months.

For homeowners planning to make their next refinance last 30 years, zero-closing cost loans can be the most expensive route. Mortgage calculators can be a helpful tool to determine which program works best.

Do You Want To “Own Your Home Sooner”

Another consideration for refinancing households is whether you want to extend or reduce the number of years until your mortgage is paid in full.

For homeowners with an existing 30-year mortgage, refinancing to a new 30-year mortgage may yield tremendous monthly savings. However, the new loan will reset your years of indebtedness to thirty. Long-term, you’ll still save money, but you’ll be paying on your loan for more years overall.

Not wanting to “start over” is one reason why the 15-year mortgage is a popular refinance choice. 15-year mortgage offer low mortgage rates and fewer years to repay in full. It should be noted that payments on a 15-year mortgage are higher as compared to 30-year loans, but over the life of the loan, today’s 15-year mortgages save homeowners 65% in mortgage interest costs.

With its huge long-term savings, the 15-year mortgage can be an excellent way to save for homeowners to plan to retirement or to save for college tuition costs.

GET TODAY’S REFINANCE MORTGAGE RATES

Deciding whether to refinance is a personal decision. Consider how long you’ll be in your home, how much you’ll save each month, and how long it will take to recoup your costs. Thankfully, with mortgage rates low, the market is ripe for homeowners to take action.

Click to get started. 

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Divorce the House, too?!

November 12, 2008

bighouse1Earlier this week I spoke to a prospective borrower who wanted to refinance his house after an unusually long and drawn-out divorce which was finalized in July of this year.  He kept the house and she was awarded $25,000 in cash from the “equity” in the house which, I was told, appraised at more than $920,000 one year ago!  He “only” owed about $830,000 on his house, so “on paper” this looked like a pretty “fair” arrangement. 

The only problem with this “$25K-worth-of-equity-to-the-ex” scenario was that his house is now only reported to be worth about $780,000 on an online home valuation website, or about $50K less than what they collectively owe this house with 5 bathrooms which they bought 7 years ago for only $600,000.  His quandary was only further complicated by the fact that he has had a couple of recent business failures and had only just started another new business 3-4 months ago in a very fickle industry.  No wife, no income, no business and a house that is pulling him under financially – that he is stuck with!  This sounds like another country music song in the making!  Hold on….. I’ve got it!  “My Home is a Man-Wrecker!” (You heard it here first!)

Last month I attended a legislative work-session in Nashville with a couple of key state legislators capitoland leaders from the housing industry (mortgage brokers, mortgage bankers, home inspectors, appraisers, and Realtors) to meet with an Obama-Harvard-Law-School-classmate-yearbook-toting-attorney-turned-Realtor-from-Illinois who was asking for feedback from several of us in the state regarding this very dilemna – couples (especially women, I assume) being wrecked by their houses after their divorce was finalized.  (Yes!  She REALLY carried in her yearbook and she was on the same page as the new Prez!) 

obamaWe were told that too many “newly-single, fresh-starts” tried to hold on to a house which was beyond their means and were emotionally unable to swallow the idea of ditching the “loser” and also having to move, at the same time.  The desire to keep the kids in the same school, the dog in the same yard and the satellite dish on the same roof tended to outweigh the conventional wisdom that, in most cases, one less income (even with some child support coming in) can not usually keep up with the same sized house payment.  We heard that the problem is that the remaining spouse is usually given 2-3 years to refinance or sell the house and maybe split some equity or to hand over the 401K to the departing spouse in trade for the equity to be realized by the remaining spouse at some time in the future.  (Sounds like a great deal, huh?!)

Whoa!  How ’bout that for a series of gut-wrenching assumptions in world which has turned topsy-turvey during the last 2 1/2 years!  House appreciation, job security, stock market stability, and credit profile integrity.   All of these can be uncontrollable variables which will either make it possible or impossible to ever get the departing spouse off of the mortgage – regardless of whether he or she “quit claims” (takes their name off of the house title work) their ownership interest to the remaining spouse.  This is a formula for certain financial ruin.  Why was it when a young couple stood before “God and in-laws” and promisedwedding-vows1 “til death do us part” that we thought they meant each other rather than the half-million-dollar house they think they should hold on to even when the judge orders them to split it all and move on.  (Surely, he didn’t REALLY mean to get rid of the house!)

The Obama classmate was advocating new Tennessee laws to require divorcing couples to get “free” mortgage approvals, home inspections, appraisals, and title searches to protect the remaining spouse from future calamity because of unexpected deterioration of the house, liens against title, over inflated assumptions of value and the inability to qualify for a mortgage – any of which would ruin the hope of making the decision to keep the house a good one.  (That 401K or IRA is sounding better and better, even in this market!)

We didn’t all agree about which law would be best or even if new laws were necessary at this point.  We all agreed that this was a big risk and all that parties needed to be informed of the dangers of keeping a house after a divorce.  We just didn’t agree about what could be done and how much legislation should be piled on an already very litigious process where attorneys and judges are already deeply involved in the personal “affairs” (no pun intended!) of two disappointed adults who thought they could beat the odds and make it through the long haul – with their combined accumulated wealth intact to the end.

It seems to me that couples should usually get rid of the house – especially if there is still a mortgage on the property.  Cleaning up that kind of mess is never as easy as one might think and could often take longer than most second marriages last!  However, in this period of declining home values, limited credit options and an unstable employment market – buy and selling houses has almost come to a stand-still in some markets.  This will cause housing markets to be flooded with inventory and homes to stay on the market longer and longer – bringing down the sales prices of homes which “must sell” to make way for a final divorce decree and marital dissolution agreement.  Years of accumulated equity in the family home may be sacrificed and never regained if a home is sold – no matter what.  This causes the houses in the surrounding neighborhood to also depreciate in value and should remind all readers that a marriage failure does really hurt the WHOLE community in MANY ways.

sleeping_couple-231x192In my 10 years of working with home buyers from all walks of life I seldom see one who comes out any better after a divorce.  The truth is – we’re all a bunch of rascals and we all blow it, from time to time.  Maybe this slow-down in the housing market will give some angry couples the opportunity to “cool down” and think through the consequences of throwing a marriage away while they wait for their house to sell.  Maybe they’ll realize that for the sake of their kids, their parents, and their own integrity that they promised “for better or for worse, for richer, for poorer, in sickness and in health” – not to the house but that one on the other side of their “sleep number” mattress.