Bills.com suggests pros, cons of refinancing in today's bumpy market.
Home mortgage rates are up half
a percent from one year ago, but down half a percent from March -- and while
this latest rate decrease has led to a surge of home refinancing activity homeowners
consider the pros and cons of refinancing in their situation before they sign
up for a new deal on their home loan.
Some homeowners are sitting on adjustable rate mortgages (ARMs) wondering if
now is the time to refinance to a fixed-rate loan. They worry -- and rightly
so -- about payments increasing, especially in an atmosphere where home values
might decline, other homeowners want to use cash from their equity
to pay for kids’ college tuition, take advantage of lower prices to put
a down payment on a second home, or remodel existing homes.
Predicting mortgage rates involves researching a complex set of variables,
explained Housser, including companies that buy and sell mortgage loans, the
status of inflation, financial markets, and the state of U.S. currency.
In light of the confusing market we suggest the
following tips to help homeowners decide if they would be wiser to refinance
now or keep their current mortgage.
Pros: Refinance now if …
1. ARM rates are rising above market rates. As interest
rates increase, ARM loan payments do, too. Homeowners concerned about payments,
and whose rate is higher than current fixed mortgage interest rates, might
consider refinancing. Many economists forecast basically stable interest rates
through Thanksgiving or so, but with the amount of uncertainty in financial
markets, there's no telling, y ou can begin the process with
a mortgage lender and have him or her watch rates for you to establish a good
time to lock your loan.
2. Refinancing is affordable. Refinancing involves
expenses that can total around 2 percent of the total loan amount. Typically,
financial advisors suggest refinancing is worthwhile if the savings on payments
will pay for the refinancing costs within two years. Homeowners can calculate
their own "break-even" date by dividing the up-front cost (the figure on the
Good Faith Estimate form) by the anticipated monthly savings. The answer is
the number of months it will take to pay off the refinance -- and sooner is
3. You've grown roots. Homeowners who plan to stay
in their homes for a long period of time might find that refinancing makes
sense. "If you have a long term left on your mortgage payments, and your rate
is higher than market rates -- or you have an ARM or balloon-payment loan and
want the security of a fixed rate -- you'll likely meet the "break-even" criteria
outlined above," Housser said.
4. One loan is better than two. For homeowners with
a first mortgage as well as a second mortgage with a high rate, refinancing
can combine the two loans into one. Second mortgages usually have adjustable
rates. If the second mortgage has a hefty balance, today's borrowers might
be better off rolling the two loans into one. Compare current loans with refinancing
options with an online calculator such as the one here.
Cons: Wait to refinance if …
1. Credit isn't stellar. Those who have made credit
mistakes (such as late payments, especially on the mortgage) will benefit from
spending a few months cleaning up their act before applying for a refinance.
Paying on time and reducing or eliminating credit card balances will earn a
better refinanced mortgage rate.
2. Life is in flux. Homeowners should not invest in
refinancing if they might sell the home within a year or two. Divorce, job
relocation, or even a big raise might make you rethink your residence, refinance
when your life is more stable.
3. The clock is ticking on private mortgage insurance
(PMI) payments. Most lenders require PMI for borrowers whose mortgage balance
is greater than 80 percent of the price of their home. When the loan value
falls below 80 percent of the home’s value, borrowers may be able to
request elimination of PMI. Some loans may even require borrowers to refinance
to eliminate PMI.
Removing PMI will give most borrowers an immediate monthly payment reduction
of $100 to $200 (the mortgage statement lists the specific payment). You may
decide to hold off on refinancing if you see falling below the 80 percent loan-to-value
mark soon, in this case, waiting a few months to refinance
could mean significant savings by eliminating your monthly PMI payments.