- Understand why refinancing makes sense today.
- Examine whether refinancing gives you a net tangible benefit.
- Don't wait too long to refinance and miss out on a chance to save money.
Take advantage of historically low interest rates while they are available
Editor’s note: The following was written by Fernando Paez, a mortgage professional and writer who lives and works in California and is a regular contributor to Bills.com.
Top Reasons Why You Should Refinance Now
If you are waiting for rates to drop again to the record low rates we experienced in 2010 before pulling the trigger on your new home loan or refinance, then you may be waiting in vain or, at the very least, you will be in for a long haul. As I write this, in early 2011, 30 year fixed interest rate loan rates are fluctuating between 4.75% and 5.25% . These rates are historically low rates. By that, I mean that these are the lowest rates (with the exception of a few months in 2010) that we have seen in the last 26 years.
There are several factors you should consider carefully, before deciding to wait for rates to drop again, and all of them will take you only two or three minutes to mull over. First, you need to know exactly what rate you currently have and how much money you will be saving each month with a new mortgage. Conversely, if you are at an interest rate that is higher than 5.75% on a 30 year fixed rate mortgage, then you need to realize that by not refinancing right now you are deliberately throwing away hundreds of dollars in monthly savings that you can realize each month in a potentially misguided attempt to obtain an even lower interest rate that may never materialize.
Net Tangible Benefits
Interest rates do not matter. There, I said it. I am sure that some of you may want to excommunicate me from the ranks of Loan Officers (too late, I have my NMLS now). How dare I say that interest rates do not matter? Of course, I am just trying to prove a point. However, a lower interest rate only matters if you take advantage of the opportunity when it is there. If you don’t lock in a low rate when it is available, hoping for rates to fall further so you can save even more, you may lose any tangible benefit that refinancing provides your family.
Net tangible benefits are most easily measured in terms of dollars saved, and your licensed loan officer should give you options that show you how much money you will be saving on a monthly, yearly, 5 year, 10 year and 30 year basis. When I send out Good Faith Estimate proposals to my prospective customers, I send them a benefit analysis that shows them how much money they will be saving. This is the number one most important reason to refinance to a lower rate, to save money on your monthly payments.
Shorten Your Loan Term
The second most important reason to refinance is to lower the term of your mortgage loan in order to pay off your debt faster. If you can afford the higher monthly payment, then you should seriously consider switching your 30 year fixed rate mortgage to a 15 or 10 year fixed. In many cases, this will save you hundreds of thousands of dollars in interest payments. This is money that goes straight into your home, or as I call it, your “real estate piggy bank”. Unless home values drop considerably, this money you pump into your property becomes solid equity for you. Since home values have historically gone up and not down, eventually your home value should go up, and consequently your equity dollars will also increase.
Another reason to switch to a shorter term loan is that interest rates on 10 and 15 year fixed rate loans are almost a full point lower than those for 30 year fixed rate loans. When interest rates for 30 year fixed are at 5.25%, we usually see 15 year loans at 4.25% and 10 year loans in the high 3’s. If you are looking for super low rates, this is where they are at! In fact, even last year when rates were lower, the 10 and 15 year fixed rates were not much lower than they are right now. This is because the closer you get to zero the tighter the margins for lenders.
Lock in a Low Rate Now
Most pundits and talking heads are speculating that interest rates will rise precipitously over the next few years. Some say that there will be a sharp spike. Others say that rates will go up gradually. A very few are saying they will stay the same or actually drop a bit. Any way you slice it, the stark reality is that interest rates are hovering around all time lows and betting that they will come down is a sucker bet. Now is the time to lock in your rate.
Borrowers need to understand that as more and more foreclosures hit the market, underwriting guidelines will continue to tighten and home values will continue to drop. If your loan to value (LTV) ratio is over 70%, then you need to run, not walk, to your favorite mortgage broker and start a loan application immediately. A loan that may be approved this month may not squeak by next month if home values continue to drop around the country or underwriting guidelines become more restrictive. Every month brokers lose many, many deals to low appraisals and the increasingly tight Fannie Mae underwriting rules.
The Bottom Line: Lock in a Rate Today!
If refinancing your mortgage will save you money at today’s interest rates, then it makes sense to try and get your home loan done now, while rates are still historically low, underwriting guidelines are still reachable, and property values have not hit rock bottom. If you wait and rates increase as expected, you could be kicking yourself for having missed the boat.
Loading more commentsSince you don't have facebook, please provide us with your location and a valid email address so we can answer it. Without a valid email address,we can't reply. (Go back to login with Facebook)
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
We get a lot of comments! To help us show our boss that this is a valuable service, so we can keep providing it, we ask you to do 2 things before commmenting:
Log in
Like us
Submit your comment!
Due to the high volume of comments received, we cannot publish and/or respond to every comment received. If you have a specific question, we recommend you search our site for an answer before commenting.
* Bills.com will not share, sell, lend, or make public your e-mail address. We reserve the right to delete any questions or comments that violate the Bills.com terms of service.
Thank you for your comment. Your comment will be posted shortly.
No Comments