When the Federal Reserve increased rates last winter — for the first time in nearly a decade — mortgage rates decreased to the lowest level in three years. We examined why mortgages rates would increase after a Federal increase, and we offer this refinance reference guide since the downward mortgage-rate trend is continuing.
2016 Rate Outlook and Recap
Rates decrease when economic insecurity causes investors to purchase safer bonds and sell riskier stocks. When the bond prices increase on this particular buy, the bond rates (or yields) decrease.
This is what has been happening this year as non-U.S. economic weakness led international investors to purchase safer United States mortgage and Treasury bonds.
Last December, 30-year fixed rates were about 4 percent on conforming loans; 4.125 percent on high-balance conforming loans; and 3.875 percent on jumbo loans. Since then, bonds have rallied, resulting in these rates decreasing by as much as 0.5 percent. That translates to lower monthly payments. On a $300,000 mortgage, that’s a savings of $85 per month; $170 per month on a $600,000 mortgage; and $253 savings per month on a $900,000 mortgage.
The savings alone is a strong reason for refinancing. The rates could decrease even further in the next several months if non-U.S. weakness continues. However, even in the downward rate trend, the rates will increase and decrease along the way.
Factors Causing a 2016 Refi Boom
Refinancing isn’t only about rates. It’s also about property, income, and asset eligibility.
During previous post-crisis rate dips, most refinances were derailed because people owed more money than their houses were worth, their income was disputed or down, and lender guidelines were unusually tight.
Now the U.S. economy is quite supportive of refinances. House prices are increasing or stable, unemployment is low at 4.9 percent, incomes are trending up, inflation is low assisted by a sharp decrease in oil prices, and lender guidelines are more flexible. Current refinance rates are less than half the historical average of 8.35%.
Reasons to Refinance
The most obvious reason for refinancing is to lower your monthly payment and rate, but there are several other objectives to consider.
- Shorter loan payoff period. You could easily go from a 30-year loan to a 15-year loan that has higher payments and lower rated because you pay the loan off in half the time, but when rates decrease, payments on 15-year loans become more achievable.
- Access cash. A cash-out refinance lets you access the equity of your home for other financial objectives like home improvements or retirement investing.
- Consolidate debt. Borrowers who qualify can roll non-housing debt like car loans, student loans, and credit cards into a house refinance. You can improve your credit score and convert non-tax deductible debt into a tax-deductible debt.
- Eliminate a second mortgage or mortgage insurance. If you bought your house with less than 20 percent down using a second mortgage or mortgage insurance – and the value of your home has risen to the point that you now have 20 percent equity – a refinance can get rid of a second mortgage or mortgage insurance.
Credit Score Impacts of Rate Shopping
Credit-scoring models know that people shop around for mortgages. Having more than one mortgage-related credit run will not reduce your credit score. Just be sure that you are able to finish shopping within 14 days.
Select a Lender Early
A rate quote is based on the refinance closing in a given number of days, normally 30 to 60 days. Longer rate locks have higher interest rates. You should choose the lender you’d like to work with early and get them the documentation they need quickly so that the lender is able to perform the shortest (and cheapest) possible rate-lock time.
You will need to provide up-to-date information for you lender about your assets, employment, income, and debts. You will need to do this even if you are refinancing with a lender you have worked with before.
Your House Must Qualify
Not only do you need to quality for the loan; your house must also qualify. An appraisal report will determine that your house is worth enough so that the refinance works. The lender may also require that certain repairs be made before closing such as water-related damage or safety issues like loose railings.
If you own a condo, the refinance will be dependent on certain requirements. Ask the lender about condo requirements well in advance of locking the refinance.
Handling Your Second Mortgage
If you have a second mortgage and are planning to leave it in place, the second mortgage holder should agree to the refinance terms before you close on the refinance. This is needed even if you have a Home Equity Line of Credit (HELOC) with a zero balance. This may end up adding time to the mortgage, and longer rate locks have higher interest rates.
Cost or No-Cost Refinance?
The viability of a refinance is about how long it takes the monthly savings from the refinance to repay the closing costs of the refinance. These costs will be $2,000 to $4,000, depending on the market. If you paid so that you could refinance and then rates decrease more, you risk losing money.
When rates are decreasing, you can choose to do a no-cost refinance. The rates on this refinance will be a little higher, but you aren’t wasting the closing costs if you decide to refinance again soon because rates dropped again.
Your lender can help you determine the best path for you based on your rate market expectations and profile.
When You Should Lock Your Rate
Before locking a refinance, you should find a suitable lender to pre-approve you using your home value estimate and full documentation. This will help you be certain that you are being locked on the timeline and program the lender can work with. If your refinance or pre-approval is ready, it is easier to lock low rates at a moment’s notice.
What to Do If Rates Decrease After You Have Locked Your Rate
Rates change every day. If rates decrease after you have committed to your rate lock, lenders have renegotiation policies that allow you to capture some of the drop. For example, if rates decreased by 0.25 percent, normal lender renegotiation policies will let you decrease your locked rate by 0.125 percent.
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