Is now a good time to refinance my house?
When looking at what has changed in the last week and a half, many people have called my cell directly to ask me “Ray, rates have been dropping, should I fix my adjustable mortgage?”
This is a time for all of us to be thinking that question. Whether you have two months, or 36 months until your mortgage rate adjusts, that very question probably has crossed your mind. I know it has mine on my houses.
First, lets analyze what has happened in the last week from the Federal Reserve meetings. We all know that by now that the two recent meetings resulted in a reduction of the fed funds rate totaling 1.25% from where it was. How does this affect all of us? Did mortgage rates drop 1.25% from where they were before last week? Just look around and ask yourself. If rates were sitting at or below 6%, did they drop below 5%? NO WAY!
The impact of the rate reduction is actually tied to short-term lending. Credit cards, auto loans, and Home Equity Lines of Credit are examples of things affected by the reduction in the fed funds rate. Mortgages on the other hand are tied to the bond market directly and the trading of the mortgage backed securities.
As much as we are seeing the lowest rates in over 3 years right now, it is not because of what chairman Bernanke did. The drop in mortgage rates over the last 2 months has come from a result of a weak job market, market performances, and inflationary situations.
Should you refinance your house right now?
If you have an adjustable rate mortgage, you should look at the potential of refinancing right now if you plan on being in your house beyond the date your loan is set to adjust. The reason for that is one way or another you will have to face the reality of refinancing sooner or later.
You may have bought or refinanced with an 80/20 mortgage in the last 3 years or so (maybe even with a 30 year fixed mortgage), you probably have a higher rate (say at least 6.5% on your first and 9% on your second). You originally did this no doubt to remove your need for mortgage insurance. Although one thing that has changed, is that mortgage insurance is now tax deductible until 2010, at least. Now if you could refinance into one loan with a rate of say 5.5-5.875% (30 year fixed) with a slight bit of mortgage insurance, which mortgage would you prefer?
If you have an interest only mortgage currently, you should look at your financial picture. Are you taking the difference between your interest only payment and what it would be if it were principal and interest and applying it to debt, investing it, or using it wisely? If so you are in a good loan. Is your interest only mortgage an adjustable? If so, you should analyze refinancing the current mortgage into a 30-year fixed mortgage that offers a 10-year interest only option. What this means is that for the first 120 months your payment will be the interest only portion. Then from months 121-360 your payment becomes a principal and interest payment to pay off your home after a total of 30 years. The safety net on this loan is that it offers a fixed rate with the flexibility of an interest only option. And the increase in payment after 120 months is about $300 per month.
Overall, mortgage underwriting guidelines have tightened and housing values are flat are down in certain parts of Colorado. It is more then ever important that you work with someone who is experienced is all areas of mortgages and LOCAL where you can sit in front of them in a professional setting. This will help insure that your income will be calculated accurately if you are self-employed, commissioned, or earn bonuses. This will insure that when you buy your home or refinance yours or your investment property, that you are explained and actually offered options that meet your needs. This will insure that you understand your mortgage through straight talk and with a credible source. This will insure that you receive competitive terms and fees to go along with the mortgage that is specific to your life. Afterall, your mortgage is a tool that can grow wealth if aligned with your life and goals. It can also cost extra monies in refinancing fees and interest paid over time, if you have the wrong mortgage.
If you have questions about if you should think about refinancing or even buying a house, let us know.
~ Ray
