The housing market finally hit bottom and the long-awaited recovery is already under way. This means that record-low refinancing rates won’t stay low for long. If you are thinking about refinancing your home, now is the time to do it, but don’t rush in. The devil is always in the details when it comes to money.
According to the latest release of Standard & Poor’s/Case Shiller home price index, single-family home prices in 20 major U.S. cities rose 4.3% on a yearly basis in October. This is the ninth consecutive month of increasing prices.
Still, current housing prices are near 2003 price levels and we have a long way to go before we return to 2007’s peak. Historically, housing prices cycle from their peak high to bottom trough in seven years, and the U.S. post-bubble housing market appears to be in sync with this pattern.
The factors that led to this improvement are low interest rates, employment stability in many areas and improvement in consumer sentiment. This trend is likely to keep on going.
At the beginning of 2012, real estate analysts predicted that continued monetary stimulus from the Federal Reserve could lead to interest rates reaching new all-time lows. They were right!
Mortgage rates are heavily influenced by the yield of the 10-year Treasury bond, as the average mortgage is either refinanced or paid off within a decade of origination. The Federal Reserve is buying billions in bonds and mortgage securities to force the 10-year Treasury yield (and thus mortgage rates) down.
Consider locking in these low rates while you can.
Rates may already be inching up. According to BankRate as of 1/14/2013, the average 30-year fixed rate mortgage is going for 3.50%, up from 3.39% one month ago. The 15-year fixed rate is unchanged from one month earlier at 2.84%. Even small increases like that translate into paying thousands of dollars more over the life of your mortgage.
Where interest rates are concerned, what comes down usually goes up. While you do have time to get on board with these low rates, nobody knows when they might really take off again.
Before you sign
If you want to refinance, you of course want the lowest interest rate based on your credit rating, equity in your home, debt ratio and household income. It seems simple to immediately take your interest rate down a few percentage points, but stay focused on the big picture. Unlike a few years ago, a refinance is more involved than just reducing your monthly payment by a few hundred dollars.
Here are a few things to think about before you sign on the dotted line:
1) How long do you plan to live in your current home?
Let’s say a refinance frees up $150 for you each month. Sounds great, right? It isn’t so great if the mortgage company tacks on a point up front – that’s 1% of the outstanding loan amount – and a few hundred dollars in fees. If you’re only staying in that home for a few more years, that refinance is hardly worth it.
If you plan to live in your home for many years, then it’s a different story. If you’re moving to a 15-year loan from your 30-year loan or from an adjustable-rate into a fixed-rate mortgage, a long-term homeowner has more to gain.
2) How much do you really save per month and for the life of the loan?
How much does your refinance cost? As part of your agreement, your mortgage company might add a lender point (potentially thousands of dollars) and other fees that hundreds of dollars more to your loan. This reduces the potential savings, making the refinance a bad idea.
3) What is the term of your new loan?
Homeowners who originally had a 30-year loan and are now refinancing eight years later should make sure the payment schedule they select pays off their new loan in 22 years or less.
Before refinancing, make sure you review all of your options with a qualified mortgage professional, and then have your accountant or financial advisor review it, too. It is always a good idea to be fully informed before making such an important financial decision. Remember: Where you live and how much you pay to live there are probably biggest financial decisions of your life.