Written by 
I’m not a loan officer, I don’t work for the federal reserve, nor am I an expert in the mortgage industry, but I do learn from personal experience. The media tells us all about the homeowners underwater on their mortgage and unable to refinance, and they tell us about the new gov’t backed mortgage programs designed to help these borrowers. What they don’t tell us is how refinancing can help a ton of people that aren’t underwater, those with little or even lot’s of equity stand to benefit from an refinance just as well. I will explain about the types of borrowers that can benefit from seeking out refinance options and why.
FHA Mortgage
An FHA mortgage is a very popular option today, mainly due to the lack of available cash for many people, and their desire to lock in a great rate on crop of cheap housing available right now. These types of mortgage only require 3.5% down payments, whereas a conventional mortgage requires you to put down a minimum of 20%. The catch is very simple, you pay an upfront MIP payment which can equal several thousand dollars, and then you pay a monthly insurance premium known as PMI (Private Mortgage Insurance). This insurance isn’t tax deductible, nor does it add to the equity in your home, rather it’s a premium you pay in order to purchase a home with less money down. Fortunately for many recent FHA borrowers the rules have changed! Instead of requiring 80% loan-to-value in order to rid yourself of PMI, the new rules only require 95%. On a $200,000 home the difference is $30,000, not a small amount by any means. I’m not advocating that you purchase a home without having the appropriate down payment, but if you currently have an FHA mortgage and have purchased your home within the past couple years then you may want to look into this. Home prices have stabilized, thus holding your equity in place, and rates have gotten even lower. By ridding your mortgage insurance payments, and lowering your interest rate, you could save hundreds on your mortgage payment each month.
Conventional Mortgages
Yes, FHA borrowers have two amazing reasons to refinance, lower rates, and ridding themselves of insurance payments. However, make no mistake here, the rates have dropped enough that a borrower with even 5% equity in their home can benefit from refinancing immensely. I bought my home less than two years ago and I locked in a rate of %5, and the rates are currently hovering around an average of 3.9%. A drop of just one percent can bring significant savings. Not to mention that many mortgage companies are willing to discount or forgo a majority of the closing costs to get your business. The cost of an home appraisal may be all that stands between you and savings hundreds of your hard earned dollars each month. If you are worried about wasting money on an appraisal do some research on your own first. Check out Zillow and Trulia for recent comparable home sales in your neighborhood, you will know if your expectations are in the ballpark or not.
All Other Homeowners
Whether you are an FHA or Conventional borrower is of little matter if you are having trouble making mortgage payments on your home. Granted a typical refinance that I’m referring to requires at least 5% equity in your home, but many in that position have still lost jobs or taken significant pay cuts and find themselves unable to keep up with payments. A refinance will allow you to not only take advantage of lower rates, but also to extend your loan back out to 30 years…which in effect will lower your payments even further. Again, I would never advocate extending the term of your debt, but I would certainly choose this option over losing your home.
You may also stand to benefit if you have the available cash to lower your mortgage term. For those homeowner with ample equity, and perhaps increased mobility in the workforce, then a lower term mortgage could save you thousands upon thousands in interest over the life of your loan. Refinancing a 30 year mortgage with say 25 years left, into a 10 or 15 year mortgage can bring significant savings in the long run. Just make sure you have the available funds as the monthly payment will skyrocket from its current amount.
Conclusion
As imperfect of a measurement as 10-year treasury bond yields are, they are the best barometer we have for gauging the movement of mortgage rates. If we follow this methodology then it appears that rates could fall even lower in 2012, however, being adverse to gambling with my personal finances I am happy to take a signifcant rate cut right now, plus the savings begin now rather than later.
We have been considering refinancing too. The rates are really good where we are so we are thinking of locking in for another 5 years. It is still a discussion though.
In the end you can typically find a no-cost refinance program somewhere, perhaps your local credit union even!
I bought about 3 years ago and got a 30yr fixed at 4.7%. Thought that was great at the time, and I still think it is.
Now I see rates below 4 and that has got me thinking about this. We plan to be in the house for many years, so I think it makes sense.
I guess I’m so focused on paying off my student loans that I’m afraid of even accidentally incurring more costs.
Even if you don’t plan on being in the house for many years, it’s probably still worth it to refinance. As I said above, even many credit unions are offering no-cost refinances… when you think about it, what’s the risk? You don’t sign the papers until you lock into a lower rate. I would at least inquire if I was in your position, can’t hurt.
I have a situation that you often don’t hear about much because it’s a huge windfall (the media likes to focus on the distress of the housing market primarily). I’ve got a 1 year adjustable mortgage that is @ 2 7/8%. Given that the Fed wants to keep rates low until at least 2013 (and they will likely still be low even after that), it doesn’t make sense for me to refinance.
A 1 year ARM also has a limitation that the rate can’t go up more than 2% in any given year. It is likely that the rate will be under 4% for 5 or more years. I am going to wait.
I have never met anyone that got a 1 year ARM before…so, nice to meet you lol!
That’s an amazing rate! I’m torn on the upside/downside of a 1 year ARM. As long as rates keep dropping, or stabilize where they are, or you maintain equity in your home in case you need to refi, then I suppose your in good shape.
A little risky for my blood, but you certainly are making out better than I am right now.
I’m trying to convince my parents to refinance. It is such a good time with rates so low but I think they will be low for at least another year so there may not be a need to rush.
I considered that myself, but then again lower rates now means instant savings today. Either way I do agree that rates dont seem to be going anywhere any time soon.
We refinanced about 4 months ago and bumped down to a 15 year loan from 30 years, and kept our payments the same. It will mean a huge deal for our finances.
We refinanced just about exactly one year ago. Got a 15-yr fixed at 3.75%! With our oldest son being only 4 right now, we will have our home paid for no later than his H.S. graduation year! Our former loan was a 25-yr fixed at 5.375%, which I thought was great. I am thrilled with the new loan, which monthly payments are within $1 of the old loan!
Heh! If you were working for the Fed, you wouldn’t be writing a blog. Rumore has it that even the janitors get a cool $200K/year. Considering all the paperwork from our last re-fi, I think we’re done for now.
I would agree that rates may be even lower in 2012, at least stay low for another 2 years. I’ve been originating loans for 15 years and mostly gave the advice to lock in the lowest rates possible (borrower pays closing costs). Today though I’m recommending more no cost refinancing. It just makes sense, if rates drop another quarter, refi again at no cost.