From when the Federal Reserve increased rates for the first time in nearly a decade, in Dec. 2015 to mid-Feb. 2016 mortgage rates decreased to the lowest level in 3 years. We carefully examined why the mortgage rates would decrease after a Federal increase, and since the downward mortgage-rate trend is continuing, here’s a refinance-reference guide.
2016 rate outlook and recap
Rates decrease when economic insecurity causes investors to purchase safer bonds and sell riskier stocks. When the bond prices increase on this particular buy, the bond rates (or yields) decrease.
This is what has been occuring in 2016 as non-United States economic weakness has led to international investors to purchase the safety of United States mortgage and Treasury bonds.
In Dec. 2015, 30 year fixed-rates were approximately 4 percent on conforming loans, 4.125 percent on high balance conforming-loans, and 3.875 percent on jumbo loans. Since then the bonds have rallied, and as result rates on the above loan tiers have decreased by as much as 0.5 percent and that translates to lower monthly-payments as follows: $ 85 lower on a $ 300,000 mortgage, $ 170 lower on a $ 600,000 mortgage, and $ 253 lower on a $ 900,000 mortgage.
The savings alone is strong-rationale for getting a refinance, and the rates could decrease even further within the next several months if non-US weakness continues. However, even in the downward rate trend, the rates increase and decrease along the way.
Factors causing a 2016 refi boom
Refinances are not only about rates. They are also about property, income and asset eligibility.
During previous post crisis rate dips, most refinances were derailed due to the fact that people owed more money than their houses were worth, the income was disrupted or down and the lender guidelines were unusually tight.
Now the United States economy is quite supportive of the refinances, with increasing or stable house prices, low-unemployment of 4.9 %, income trending-up, low inflation assisted by a sharp decrease in oil-prices and the lender guidelines are more flexible than in any other post crisis rate dip. The current refinance rates are less than half the historical average of 8.35%.
Reasons to refinance
The most apparent reason why you should refinance is for you to get a lower monthly payment and rate, but there`re several other refinance objectives you should consider:
- Shorten your loan pay-off period. For instance, you could easily go from a thirty-year loan to a fifteen year loan that has higher payments and lower rates because you pay the loan off within half the set time -but when rates decrease, payments on 15-yr loans become more achievable.
- Access cash – A “cash-out” refinance enables you to access the equity of your home for your other financial objectives, like funding home improvements or retirement investing.
- Consolidate debt – If you qualify, you’ll be able to roll non housing debt such as car loans, student loans and credit cards, into a house refinance. By doing this you will be able to improve the credit score, and convert that non tax deductible debt into a tax deductible debt.
- Eliminate a second mortgage or mortgage insurance – If you purchased your house with less than 20% down using a second mortgage or mortgage insurance, and the value of your home has risen to the point you now have 20%-equity, a refinance can get rid off of a second mortgage or mortgage insurance.
Credit score impacts of rate shopping
Credit-scoring-models know that people shop around for mortgages, as a result having more than 1 mortgage related credit run will not reduce your credit score. As long as you are able to finish shopping in fourteen days.
Select a lender early
A rate-quote is based on the refinance closing in a given number of days- normally 30 to 60 days – and longer-rate-locks have higher interest rates. Hence you should select the lender you would like to work with early enough, and also get them the needed documentation so that they’re able to perform on the shortest (and as a result cheapest) possible-rate lock timeline.
Even if you are able to refinance with the lender you have worked with previously, federal laws need them to bring up to date your asset, employment, income, and debt-documentation for a new loan.
Your house must qualify
Apart from you qualifying for loan, your house must also qualify. An appraisal report should ascertain that your house is worth enough so that the refinance works, and the lenders may require certain repairs before the loan closing — such as, water related safety or damage issues like loose railings.
If you are the owner of a condo, it will be dependent on certain requirements. You should ask the lender to inform you about the condo requirements well in advance of locking the refinance.
Handling your 2nd mortgage
If you have a 2nd mortgage you are planning to leave in place, the 2nd mortgage holder should agree to the refinance terms prior to the closure of the refinance. This is needed even if you’ve a HELOC (Home-Equity-Line-of-Credit) with a zero-balance. This may end up adding time to the mortgage , and, longer-rate locks have higher interest rates.
Cost or no cost refinance?
Refinance viability is about how it takes the monthly savings from the refinance to repay the refinance closing costs ($ 2,000 to $ 4,000, depending on the market). However, if you paid so that you can refinance, and then rates decreased more, you would risk losing money.
So when the rates are decreasing, you can decide to do the no -cost refinance. The rates will be a little higher on the no cost refinance, but then you aren’t wasting the closing costs if you decided to refinance again soon after due to the fact that the rates decreased.
Your lender can assist you in determining the best path you should take based on your rate market expectations and profile.
When you should lock your rate
Prior to locking a refinance, you should find a suitable lender to pre-approve you using your home value estimate and full documentation so that you can be certain you are being locked on the timeline and program the lender can work with. If your refinance or pre-approval is ready, it is easier to lock-rates low at a moment’s notice- as rates increase and decrease on the trading days.
What you should do if rates decrease after you have locked your rate
Rates change every day, and if rates decrease after you have committed to your rate-lock, the lenders have re-negotiation policies which allow you to capture a section of the drop.
For instance, if rates deceased by 0.25% after your rate-lock commitment, the normal lender renegotiation policies will allow you to decrease your locked-rate by 0.125%.