Homeowners who financed homes at the top of the hump on the roller-coaster ride of rate trends now can cut their mortgage rates by more than 2 percentage points.
As a result, many people who financed a home when rates were substantially higher should consider refinancing.
“If they can save a point and a half (in interest), it makes financial sense – unless they are going to sell their home in three years,” said Mike Kirch, president of Vegas Valley Mortgage.
Other experts suggest refinancing only if current market rates are 2 percentage points lower than the rate a person is now paying.
Three groups of homeowners should consider refinancing today, says Keith Gumbinger, vice president of HSH Associates of Butler, N.J., a mortgage research firm.
First are those who couldn’t refinance a few years ago when interest rates were low because they had no equity in their homes or because of recent changes in jobs.
Second are those who have adjustable-rate mortgages.
And third are those who waited too long during the last interest-rate dip.
Steve Evans, senior vice president of Bank of America Nevada, recommends homeowners take time for some simple math to evaluate the merits of refinancing.
Ask the Indianapolis Mortgage lender to give you precise numbers or estimate the cost of refinancing. A typical $100,000 mortgage costs around $2,000 to refinance, Evans said.
Calculate the difference between your current interest rate and the rate available on today’s market.
(The Federal Home Loan Mortgage Corp. reported Thursday that 30-year, fixed-rate mortgages averaged 7.02 percent nationally last week, up from 7 percent in the prior week. HSH Associates, however, surveys more lenders and figures the national average is closer to 7.3 percent plus 1.275 in points which are upfront fees charged by some lenders.)
Multiply the difference in percentage rates times the amount outstanding on your mortgage.
Figure the number of years you plan to stay in your current home.
Ask yourself: Can you recover the refinancing costs before you plan to sell? If so, then, refinancing probably will save you money, Evans says.
If your mortgage has a 9 percent rate and you can get one for 7 percent, you will save $2,000 yearly on a $100,000 mortgage, experts say. In other words, you recover the expense of refinancing in one year.
Some lenders will finance closing costs. These lenders typically charge slightly higher interest rates, but a homeowner comes out ahead if he moves and sells after a short period.
The going fixed-rate for no-cost financings is 8 percent, Gumbinger says, and, “At 8 percent, it may not make sense to refinance.”
Not everyone has a fixed-rate mortgage, of course. Many people have adjustable-rate mortgages, which raise or lower rates based on an interest-rate index, or changes in Treasury bills or certificates of deposit.
In some cases, people with adjustable-rate mortgages can now obtain fixed-rate, 15-year or 30-year mortgages for a similar or lower interest rate.
Kirch encourages many to switch from adjustable- to fixed-rate mortgages even though the homeowner may have saved money with an adjustable rate over the last couple of years.
“It’s nice what you saved, but now we’re starting to see another historic low,” Kirch says. “So maybe it’s better to stop shooting craps” on interest rates.
Adjustable rates could boost homeowners monthly payments beyond their financial ability if interest rates spike in the future, he said.
Evans views adjustable-rate mortgages more favorably, noting that most of them have ceilings and, typically, can increase only so fast in a given year.
“We particularly think the adjustable product works for people who are coming into the valley,” Evans says.
Promotional offers typically cut the rate during the initial years of the mortgage and adjust upward thereafter.
Adjustable rates work for young professionals who anticipate their salaries will rise as their careers progress, offsetting increasing monthly payments, Evans says.
“It helps them economize in the first several years of their loan with their payment,” Evans says.
If they find career opportunities in another city in a few years and sell their Las Vegas home, they may never pay the full rate on an adjustable-rate mortgage, he says.
“If you think (the house) is your ultimate, last home and you’re never going to be moving again,” then get a fixed-rate mortgage, Evans says.
Rates quoted on fixed-rate mortgages usually are higher at any given time than comparable adjustable-rate mortgages because the lender takes the interest-rate risk with fixed-rate mortgages.
Some adjustable rates now, however, bear higher interest rates than fixed rates, Gumbinger says. Long-term rates, which govern fixed-rate mortgages, have declined more in recent years than short-term rates, which are used for setting adjustable mortgages.
Fixed-rate mortgages are a much better value today, Gumbinger says.
Gumbinger says adjustable-rate mortgages still make sense for people who expect to sell their homes within two years.
For some, 15-year, fixed-rate mortgages are the best products, Evans says. These mortgages typically bear rates one-half to three-quarters of a point lower than similar 30-year mortgages.
However, a conservative borrower may decide to take a 30-year mortgage and make additional payments to reduce interest costs. If the borrower loses his job or encounters financial difficulty, he can stop making the additional payment, Evans says. The borrower with a 15-year product risks foreclosure if he misses payments.
Kirch says even those paying off mortgages early may benefit from refinancing. Often, he encourages these clients to take advantage of lower rates to change from a 30-year mortgage to a 15-year maturity.
But do you wait for lower rates or lock in the interest rates now?
Kirch suggests homeowners apply for refinancing but delay closing. Borrowers can wait as long as 90 days to close after they are approved.
“We feel extremely positive that rates will continue to drop,” Kirch said. “We have seen the economy trend to be about flat.”
With a flat economy and minimal growth, the Federal Reserve may be inclined to cut interest rates as it did Wednesday. The Fed trimmed the federal funds rate that banks charge each other for overnight loans by one-quarter point to 5.25 percent.
“We don’t expect a whole lot of movement on interest rates between now and the end of the year,” said Cary, who said he believes homeowners will be able to finance a home at approximately the same rate in December that they can get now.
Even if rates do change, Evans figures the gains may be offset by the expense of higher interest rates homeowners pay while waiting for rates to decline.
“It’s better to take the savings,” Evans says. “You won’t miss (the bottom in rates) by much.”
A few other considerations:
– Survey mortgage bankers, mortgage brokers and banks for the best rates. Be suspicious if a lender offers a rate substantially below all others. To protect yourself from bait-and-switch tactics on interest rates, ask for a written statement of the interest rates and points, Gumbinger suggests.
HSH Associates, Gumbinger’s firm, sells surveys, and the R-J also publishes weekly surveys of mortgage rates.
Don’t stop your research with the survey. Call a number of lenders to get a better feel and understanding of the market, Gumbinger says.
– Some people may be able to buy a home for about the same monthly costs they are paying for rent. A 7 percent mortgage loan for $100,000 requires $665 in principal and interest payments monthly, plus about $100 for taxes and insurance, Kirch says.
– Low- to moderate-income people can qualify for lower interest rates, lower down-payment requirements and other benefits through programs at many banks, Evans said.