Consistently low mortgage rates continue to provide refinance opportunities for homeowners nationwide. Lower mortgage rates bring new chances for homeowners to refinance, while also allowing potential homebuyers to qualify for larger mortgage loans without increasing their monthly payment.
With the Federal Reserve expected to lift interest rates in the coming months, mortgage rates should be a lot more volatile in the meantime. Before rates rise too quickly and shut out your refinance opportunity, here are seven reasons to refinance now.
7 reasons to refinance now
No. 1: New opportunities exist
Each time mortgage rates fall, the pool of potential refinance customers grows. While the old rule of thumb was to wait until interest rates fell two percent below your current rate before you refinanced, our current rate environment suggests consumers do not need to wait to have a two-percent gap before they move forward. In fact, the rate threshold in which you can refinance and still save is much lower than two percent.
No. 2: Current mortgage rates are extremely low
The overall average rate for 30-year fixed rate loans (conforming, non-conforming and jumbos) is still below 4 percent, according to HSH.com. Not only does that suggest that rates will be low for some time to come, but that great refinance opportunities will exist even when mortgage rates begin to step upward from where they are now.
No. 3: You can do a no-cost refinance
Patrick Cunningham, vice president of Home Savings and Trust Mortgage in Fairfax, Virginia, says a "no-cost refinance" can provide financial benefits even if the mortgage rate difference is smaller than it would be in a traditional refinance since you are financing the closing costs and fees into the rate and/or loan amount.
For example, if you refinance a 30-year fixed rate mortgage at $400,000 from a 4.5 percent mortgage rate to just 4 percent, you'll save $117 per month on your principal and interest payments, and $42,149 in overall interest.
No. 4: lending conditions have eased
Mortgage lenders and mortgage insurance companies have slightly loosened credit standards, says Tom Shaw, vice president of marketing for Carrington Mortgage Services in Santa Ana, California.
According to the latest Federal Reserve's Senior Loan Opinion Survey, a few banks reported having eased their credit standards for mortgage loans over the previous three months.
Most recently, Fannie Mae and Freddie Mac announced programs that would allow homeowners to refinance loans at 97 percent loan to value (i.e. just 3 percent equity).
No. 5: HARP is still available
The federal government's Home Affordable Refinance Program (HARP) has been extended through 2015. Since many eligible borrowers still haven't pursued HARP, mortgage lenders have begun to make greater outreach efforts to lock in good customers.
According to HARP.gov, over 650,000 loans in the United States are eligible to refinance and save through the government’s program.
No. 6: Change loan products
"Interest rates on 10, 15 and 20-year home loans are lower than rates on 30-year loans," says Shaw. "With a shorter loan term you pay less interest over the life of the loan and pay off your loan in faster."
The downside is that your payments will likely be higher, but how much higher depends on your loan balance.
For example, if you've been paying down a $300,000, 30-year fixed-rate loan at 5 percent for 10 years, your balance is now $236,736. Refinancing that balance into a 15-year loan at 3.5 percent will raise your monthly payments by just $82 and shorten your loan term by five years.
"If you're in an adjustable rate mortgage that will adjust in a year or two, this would be a good time to shift to a fixed-rate loan so you get to extend the advantage of low interest rates," says Shaw.
You may also want to consider consolidating your first mortgage and a home equity loan into one mortgage before interest rates rise, suggests Shaw.
No. 7: You have more home equity.
Since rising home values are returning lost equity to many homeowners, refinancing can make sense with even a small difference in your interest rate because you might be able to eliminate your private mortgage insurance, says Cunningham. You can also refinance from an FHA to a conventional mortgage to eliminate mortgage insurance payments, as long as you have sufficient equity.
More home equity also means you won't need to bring cash to the table to refinance. Furthermore, interest rates can be slightly lower when your loan-to-value ratio drops below 80 percent.
With current mortgage rates on the decline and home equity on the rise, it’s a perfect time to refinance your mortgage to save not only on your monthly payments, but your overall interest costs as well.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.
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