7 reasons to refinance now
While rising mortgage rates have sent some refinancing homeowners to the sidelines, there are many reasons why now is still a great to refinance your mortgage. A refinance calculator can be used to estimate the cost and benefits of refinancing in the context of your financial plan.
7 reasons to refinance
No. 1: Mortgage rates are rising -- act now. Mortgage rates are expected to continue rising, so act now, says Jay Dacey, a mortgage broker at Metropolitan Financial Mortgage Co. in Minneapolis. For example, if you want to refinance a $400,000 loan balance into a 30-year fixed-rate loan, your payments at a rate of 4.19 percent would be $1954. If you refinance in the future at 6 percent, for example, your monthly payment would be $444 higher.
No. 2: Current mortgage rates are still extremely low. Even if current mortgage rates aren't as good as they were a few weeks ago, they're still really low, says Tom Shaw, vice president of marketing for Carrington Mortgage Services in Santa Ana, Calif.
"While mortgage rates rising 50 to 100 basis points sounds terrible, it's not necessarily going to make that big a difference on your monthly mortgage payment," he says.
According to HSH.com, average mortgage rates five, 10 and 15 years ago hovered around 7 percent. Thirty years ago, mortgage rates were 13.52 percent, so an interest rate above 4 percent looks great historically.
No. 3: You can do a no-cost refinance. Patrick Cunningham, vice president of Home Savings and Trust Mortgage in Fairfax, Va., says a "no-cost refinance" can provide financial benefits even if the mortgage rate difference is small since you don't have any out-of-pocket expenses.
For example, if you refinance a 30-year fixed rate mortgage at $400,000 from a 4.5 percent mortgage rate to 4 percent, you'll save $117 per month on your principal and interest payments, and $42,149 in overall interest.
No. 4: Credit standards have eased. Mortgage lenders and mortgage insurance companies have slightly loosened credit standards, says Shaw.
According to the Federal Reserve's Senior Loan Opinion Survey in April 2013, a few banks reported having eased their credit standards for mortgage loans over the previous three months.
"Mortgage insurance companies are loosening up a little and insuring refinances with as much as a 95 percent loan-to-value," says Dacey.
No. 5: HARP has been extended. The federal government's Home Affordable Refinance Program (HARP) has been extended through 2015. Shaw says that many eligible borrowers haven't pursued HARP, so he expects lenders to make greater outreach efforts.
No. 6: Change loan products. "Interest rates on 10, 15 and 20-year home loans are lower than rates on 30-year loans," says Shaw. "With a shorter loan term you pay less interest over the life of the loan and pay off your loan in faster."
The downside is that your payments will likely be higher, but how much higher depends on your loan balance.
For example, if you've been paying down a $300,000, 30-year fixed-rate loan at 5 percent for 10 years, your balance is now $236,736. Refinancing that balance into a 15-year loan at 3.5 percent will raise your monthly payments by just $82 and shorten your loan term by five years.
"If you're in an adjustable rate mortgage that will adjust in a year or two, this would be a good time to shift to a fixed-rate loan so you get to extend the advantage of low interest rates," says Shaw.
You may also want to consider consolidating your first mortgage and a home equity loan into one mortgage before interest rates rise further, suggests Shaw.
No. 7: You have more home equity. Since rising home values are returning lost equity to many homeowners, refinancing can make sense with even a small difference in your interest rate because you might be able to eliminate your private mortgage insurance, says Cunningham. You can also refinance from an FHA to a conventional mortgage to eliminate mortgage insurance payments, as long as you have sufficient equity.
More home equity also means you won't need to bring cash to the table to refinance. Furthermore, interest rates are typically slightly lower when your loan-to-value drops below 80 percent.
Even though current mortgage rates are rising and are likely to rise further, they're still historically low. For many homeowners, a refinance now still makes financial sense.
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Michele Lerner, author of "HOMEBUYING: Tough Times, First Time, Any Time", has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT's REIT magazine and numerous Realtor associations.