Refi Rate Update: Why Now is the Time to Act
If you've got an adjustable-rate mortgage or a mortgage above 6 percent, it's time to start looking around for a good deal on a fixed-rate mortgage. Why? Two key forces are converging in the next few months that could lead to a jump in mortgages: the Fed is no longer buying mortgage assets and private mortgage insurers are getting back into the market, but no one knows for how long.
The Fed completed its $1.25 trillion mortgage asset buying spree and no one knows if private investors are ready to get back in the game. If private investors don't pick up the slack mortgage rates could start creeping back to the 6 percent range or higher. Last week they were down a bit from 5.14 percent to 5.03 percent for a 30-year fixed and from 4.38 percent to 4.29 percent for a 15-year-fixed.
How much can you save with refinancing? Obviously that will depend on your current situation. A great tool you can use to determine how much you'll save is the "Savings from Refinancing" calculator at BankRate.com. After putting in the required numbers regarding your current mortgage and closing costs for the new mortgage, you can find out your new monthly payment, monthly savings, your interest savings, total cost for refinancing and the number of months it will take to recoup those costs.
If you're only planning to stay in your house another five years, a 3.67 percent 5/1 ARM may also be worth looking at. But, be sure you're moving. In five years interest rates could be up dramatically because the Fed's current benchmark rate near 0% won't be around anymore. So don't risk an adjustable-rate loan unless your plans are absolute.
Another positive sign for the mortgage marketplace was the return of private mortgage insurers. They had just about stepped out of the mortgage market and refused to insure anything above an 80% loan-to-value, leaving the government as the only option for anyone who wanted to refinance with less than 20% equity. That's finally turning around.
Private mortgage insurers - Genworth, MGIC and Radian - are just starting to get their toes wet again in the mortgage market for people with equity of just 5%. You will need to have a good credit score of at least 680 to even be considered by the private mortgage insurers. If you're in a restricted market because of declining prices, you may find it more difficult to get a loan. These restricted markets include Arizona, California, Florida, Nevada and some parts of Georgia, Illinois, Michigan, New York and New Jersey.
With private mortgage insurers back in the marketplace, you'll have more options when you start shopping for a loan because the government is no longer the only player. That means there will be more competition for those well-qualified borrowers. But no one knows how long this competition will last.
With the stock market dropping dramatically on May 5, clearly all investors are still jittery. So take advantage of the dip in mortgages while you still can.
Just to give you an idea of how much money you could save, let's take a look at someone with a $200,000 mortgage at an interest rate of 6.5 percent for 30 years. His principal and interest payment would be $1,264.14. If he refinanced at a 5 percent rate for 30 years, the new payment would be $1,073.64. The total savings would be $68,577.41 in interest over 30 years.
You might think, "I'll never be in my home for 30 years, will it still be worth it?" Using this amortization calculator, you can see that in five years with a 6.5 percent loan one would pay $64,084 in interest, but with a 5 percent loan would pay $49,605 in interest, which is a $14,479 savings. If the refi costs $6,000, there would still be a savings of $8,479. Remember you pay a large portion of your interest in the first half of a mortgage loan.
Generally, as long as you can cut your interest rate by at least 1 percent and you expect to be in your home for more than 3 years, the interest savings will pay for the costs of refi. The key is to find a refi with no points and low closing costs. Shop around, and be sure to compare your closing costs carefully.
One good place to start shopping is the Lending Tree, where you can get lenders to bid on you. Be sure to get a full statement of closing costs and compare them on your own spreadsheet. If one lender is low-balling you and not including some key costs, such as state taxes, check to find out why. You may find that with the missing figures added the one that look like the lowest cost lender is actually the most expensive one.
Lita Epstein has written more than 25 books including The Complete Idiot's Guide to Improving Your Credit Score and The 250 Questions Everyone Should Ask About Buying Foreclosures.