There is probably no one on the planet who thinks the current mortgage rates would continue to maintain a downward spiral, and they are doing just that. In January of this year, Freddie Mac reported that 30 year fixed rate mortgages fell to around 4.0%, while the 15 year fixed rate loans dropped to an average of an astonishing 3.2 %. What this means for anyone thinking of refinancing, even if they already have previously, just gives added momentum to consider doing so all over again to reap the rewards of increasingly lower interest rates. The savings can prove to be quite hefty in aiding all the cash-strapped budgets across the country that need all the help they can get.
Even if a homeowner took advantage of lower rate just a short time ago, back when the rates were a very affordable 5%, considering a new refinancing option with a rate of 4% on a $200,000 30 year loan would put around $43,000 back into their pocket over the life of the mortgage. The decision does require a potential borrower to evaluate the refinance option carefully, regardless if the standard advice formerly suggested that a 1% or more decrease in the interest rates more than paid for the trouble. Certain mortgage experts maintain there are a few newer realities to deal with if anyone hopes to acquire a favorable refinancing deal.
Balance the ReFi Savings Versus the PMI Costs
One of these newer realities are the potential for a few higher fees or unexpected costs that must be taken into account, which can certainly undermine any possible savings benefits. This is primarily due to the fact that the housing market in general, and the value of homes specifically may trigger a lending institution to request the added expense of private mortgage insurance (PMI) if the equity in the residence falls below 20%. This expense is further determined not only by the equity factor, but a borrower’s credit rating as well, which may have taken some recent hits as the economy flattened out. It is advisable to utilize a mortgage calculator to play with a few refinancing scenarios to balance the up-front closing costs, including the possible PMI expense, against the projected savings to determine the feasibility of refinancing at the present time.
HARP’s New PMI Guidelines
Almost everyone has heard of the fed’s Home Affordable Refinance Program (HARP) which offers more favorable loan refinancing terms. One of these benefits is virtually eliminating the stipulation for the borrower to acquire private mortgage insurance (PMI), even should their equity be less than the 20% required. As long as the mortgage is backed by Freddie Mac or Fannie Mae, and, the borrower has a residential loan (house or condo) from May of 2009 onward, then they should qualify for this program.
Tighter Credit Requirements
Due to the so-called housing bust of recent years, lenders have certainly applied far more stringent credit requirements for anyone seeking any type of mortgage, for refinancing or otherwise. Only those potential borrowers who happened to have been fortunate enough to maintain a credit rating of 740 or above were going to receive the best interest rates. Therefore, if is advisable for borrowers who are thinking about taking the refinance step to take a hard look at the current credit status. Obviously, taking any corrective action to improve those scores will keep a borrower from being assessed a higher rate when applying, which could cost thousand in extra interest payments over the full extent of the loan new term.
Shorter Loan Terms Yield Huge Interest Savings
Another good idea to consider when refinancing is the possibility of a shorter mortgage term. If the homeowner is already well into a 30 year loan, choosing to extend that obligation out for another identical time-frame has its downside, even if the rates and monthly payments will be lower. One option is to think about taking on a 15 year loan. The comparable difference would be illustrated in this example: a $200,000 mortgage with a 15 year term would save the homeowner around $77,000 in interest against the same loan spanning 30 years. Granted, the payments every month would be substantially higher, going from $954 to $1,479, but this is factored against the interest saved over time.
A second option would be a 20 or 25 year mortgage, which can have interest rates a bit better than a 30 year loan, though not quite as affordable as a 15 year term. A third option would be termed a ‘cash-in’ refinance, where the borrower applies up-front funds toward the shorter term refinance option to offset the higher monthly obligation, in the form of what is essentially a loan-prepayment. When one considers the mediocre prospects of most other forms of investment in this troubled economy, refinancing is still regarded as a very attractive option. And if interest rates continue to stay at these historic lows, then the refinancing option just keeps looking better and better for 2012.