You may have noticed that this week mortgage rates dropped to new lows here in the US. The primary cause of this drop is the debt crisis in Europe, which has led to investors to move capital from the distressed Euro-zone into US debt markets. So if you missed the opportunity to refinance in 2009, you might want to take a second look at it now. These rates may not last long!
So what do you need to be a good candidate?
First, you should have a strong credit score – 740 is a minimum score in today’s environment to get the best rate. Also, you should owe less than 80% on your home (that generally includes home equity loans). The problem for many people is figuring out what the value of your home is in this environment. The best way to do that is to hire an independent appraiser. However, if you don’t want to take that step, you can check out recent home sales in your neighborhood using a real estate website like Zillow.com. Or, check with your local realtor for an estimate.
The next thing you probably should have is an expectation that you will stay in the house for a while. As a general rule, if you aren’t going to be in the house for at least a couple of years, you probably can’t recoup your borrowing costs.
How Low Are Rates Now?
You’ve probably heard that rates on a 30-year fixed rate mortgage are now under 5%. Fifteen-year mortgages are now under 4.5%, and 5/1 adjustible-rate amortizing loans can be found under 4%.
How Do I Go About a Re-Fi?
You’ll want to shop around with various lenders to make sure you’re getting the best rate possible. But don’t look just at the rate. You’ll also want to inquire about the types of fees each lender charges to refinance. You will want to compare fees with at least one other lender to make sure they are reasonable.
Also, you should know that the rates from an independent broker can be negotiated, but don’t fall prey to the tactic of offering a lower rate, but paying points or a high “origination fee” in return. There are multiple levers they can pull, so try to settle on fees first, then compare rates.
Also, we recommend you avoid rolling the fees into the loan. If you don’t have the cash to pay them out of pocket, you can have them included in the rate instead. Then, you can just compare rates to make sure you get the best deal, once you know the fees are reasonable.
While fees may vary slightly from lender to lender, in general they should be similar. Over 90% of mortgages in today’s market are backed by the US government. So there is a lot of standardizing in the current process. Here are some typical closing costs:
- Application fee
- Appraisal fee
- Credit report fee
- Attorney/legal fees
- Loan origination fee
- Survey costs
- Title search
- Title insurance
What If My Rate Goes Up?
Sometimes, it can take up to two months for a refinance to be finalized. So once you’ve found a lender, you want lock in that rate as soon as possible. Most lenders should provide this service at no additional charge.
Ultimately, it makes sense to refinance if you’re certain that you’ll be able to recoup the cost of refinancing during the time you own the home. So, it’s important to do the math ahead of time and calculate your break-even point (the point at which you’ll begin to save money after paying fees or closing costs). We would be happy to assist you with framing the decision, so feel free to call me and we can discuss. Bottom line, if you think you will be in your home for a while, you have a good credit score, you have less than 80% of the value of your home in mortgage debt, and your current rate is over 6%, you are probably a prime candidate for a refinance.
Please call if you have any questions!