Mortgage Rates Fall = Second Chance for Procrastinators

Falling mortgage rates are opening a new window for some borrowers, including those who missed their opportunity to refinance last year when rates hit similar lows.

Thirty-year fixed-rate mortgages averaged 4.39% for the week ending Aug. 4, the lowest level for the mortgage in 2011, according to the latest survey from Freddie Mac, released Thursday.

Looking for a 15-year fixed-rate mortgage? Those averaged 3.54% in the latest survey – the lowest they’ve been in the history of Freddie Mac’s survey. Five-year Treasury-indexed hybrid adjustable-rate mortgages also hit a record low, averaging 3.18%.

The rate drops came courtesy of glum economic reports as well as continued concerns about economies abroad. A sharp drop in the stock market also may have sent more investors toward bonds and mortgage-backed securities – which brings mortgage rates down.

History suggests that rates won’t go much lower, and it’s also anyone’s guess as to when rates will begin an upward trend once more. While the economy looks grim right now, a dose of optimism from some report or another could turn things around. Expectations are so low now that even slight surprises could cause rates to rise. Should the Federal Reserve adopt additional “quantitative easing” to stimulate the economy, that also could affect mortgage rates for the worse.

All of which is to say that if you’re in the market to refinance, get moving now. Below are some points to keep in mind before you start shopping.

What’s your home worth?

One of the biggest hurdles to refinancing today is a drop in house prices: If your home’s value has dropped since the origination of your last mortgage, refinancing might not be quite as appealing as you thought.

If your home value has fallen, you might need to pay down your principal in addition to whatever closing costs you’ve agreed to pay, in order to get the best rates. According to Freddie Mac, 26% of people who refinanced in the second quarter of 2011 brought cash to the closing table.  The whole concept of cash-in refi isn’t unheard of, but you’re taking money out of savings and plunking it into an equity situation. And with falling home prices, there’s the fear of “I’m going to put 10 grand in and it could be gone tomorrow.”

Others simply aren’t able to pay down principal for a refi. We’ve got a generation of borrowers out there who have been paying on their mortgages and carrying an above-market rate, but can’t refinance because the appraisal won’t allow them to do so.  At least have a ballpark idea of what your home is worth before calling a lender – and before wasting $400 or so for an appraisal that tells you your home value has drastically fallen.  To protect our clients, we regularly pull property profiles to make sure the expected and/or needed value is likely.

Make sure it makes sense.

An old rule of thumb is that refinancing makes sense if you’re able to get a rate that shaves a percentage point off your mortgage. For instance, on a $200,000, 30-year fixed-rate mortgage, the monthly payment is $1,136 per month if you have a 5.5% rate and $1,013 if you have a 4.5% rate.  That kind of savings probably makes a refinance worthwhile.

Another way to look at it is the client’s “break-even point.”  At TNG Mortgage, we typically like to see our clients be able to break even on the cost of the refinance in 36 months. Every situation is unique, and clients have wide-ranging goals.  In some cases, for instance, longer break-even periods could make more sense, if the homeowner plans on living in the home for a long amount of time to come.

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