Mortgage interest rates fell below 5 percent again last week, and this week dropped further, according to Freddie Mac’s Primary Mortgage Market Survey.
“Mortgage rates eased further over the week, helping to promote an affordable home-purchase market and stimulate refinance,” said Frank Nothaft, Freddie Mac vice president and chief economist. “This comes at a time when house price declines are moderating and consumer demand for prime mortgages at commercial banks has picked up.”
Having mortgage interest rates drop below 5 percent combined with the recent extension and expansion of the home buyer tax credits gives buyers a unique opportunity to purchase a home with interest rates at nearly 50-year lows.
But if you have enough equity in your property, it may also be a great time to lock in a lower interest rate and refinance your loan’s existing balance.
Here’s how to think through a refinance:
Will you qualify for a refinance? Before you put in any time and energy into working out the details of your refinance, try to assess your property’s current value. Contact a local real estate agent to discuss what homes in your neighborhood are selling for – not what they’re listed for. Try to figure out whether there are a lot of foreclosures in your neighborhood, or just a few. Neighborhoods that are awash with foreclosures tend to have steeper price drops than those that have fewer homes for sale.
How much equity do you have in your home? If you have at least 20 percent equity based on the current market value, then you should be able to do a conventional refinance. Today, conventional lenders won’t do a refinance unless you have at least 20 percent equity in your property and have verifiable income. FHA loans are available for less than 20 percent down loans and their guidelines differ somewhat from most Fannie Mae and Freddie Mac lenders, but these FHA loans are generally available for new purchases of homes and not for homeowners who want to refinance.
Can you qualify for “underwater” mortgage programs? If the value of your house is less than what you owe on the mortgage, then you are considered to be “underwater.” If your loan is owned or securitized by Fannie Mae or Freddie Mac, you might still be able to refinance your mortgage even if you are underwater. Under some federal programs, you may be able to refinance even if the loan balance is 125 percent of what the house is worth.
What are you trying to accomplish? Some homeowners want to lower their monthly payment. Others want to shorten the loan term. Start by figuring out what your financial goals are for the refinance, and then prioritize them so you know which of your financial goals are most important.
Shop around. Although Fannie Mae, Freddie Mac, and FHA are collectively responsible for nearly 90 percent of the loans being originated, there is a wide variety of fees being charged when you refinance your mortgage. Ask the lender to list every fee so you understand what you’ll be paying and what interest rate you’ll be getting. If you belong to a credit union, or can join one, you may want to check out the interest rates and fees available there, since non-profit credit unions often charge less than for-profit banks.
Remember, water cooler bragging rights are meaningless. Instead of bragging about the super-low interest rate you got, focus instead on how many years you can chop off of your loan. If you have 25 years left on your loan but can refinance to a 15-year loan, that’s where the real savings comes in.
Read more about refinancing your mortgage