It Seems Nothing Can Stop Mortgage Rates’ Steady March Downward
Mortgage rates are tumbling.
Even staunch homeowners, completely satisfied with their mortgages, are now considering a refinance.
Today’s low refinance rates have caused a tidal wave of applicants who have finally decided to make a move.
According to the Mortgage Bankers Association, refinance applications jumped a staggering 21 percent, matching levels not seen since January 2015.
Just weeks ago, the weekly survey clocked in at only low-single-digit changes, despite rates already at 3-year lows.
Homeowners are no longer taking chances on continually low mortgage rates.
As mortgage rates sink, here are nine ways homeowners are cashing in on today’s rock-bottom rate market.
1. Homeowners Are Making Their Homes More Affordable
The first and most obvious reason to refinance is to reduce monthly payments, thereby lowering the cost of homeownership.
When rates drop, a refinance is the typical means by which you “trade in” your old mortgage for a new one. The new mortgage should come with better terms.
It’s a little like trading in an old car. Suddenly, you get higher performance, better gas mileage, and in many respects, lower costs of ownership.
Yet, mortgage refinance cost savings can dwarf those of owning a new automobile. In fact, the cost reduction can be staggering, especially for bigger loan amounts.
Homes in areas like Seattle, Washington and Los Angeles, California often come with big price tags and, in turn, big mortgages. Loan amounts past a half-million dollars are not uncommon.
Consider this: a homeowner with a $400,000 mortgage drops their payment by $230 per month with a one percent reduction in rate.
But homeowners with loan amounts approaching “jumbo loan” territory aren’t the only ones who can save. A one percent rate drop will save a homeowner $40,000 over the life of the loan, even though their loan amount is just two hundred thousand dollars.
Many homeowners are hesitant to refinance due to cost. They figure it will take months or years to make up the closing costs associated with a refinance.
Rates have dropped so much, however, that a zero-closing-cost refinance is now within reach for many homeowners.
A zero-cost mortgage still has costs, technically, but the lender pays for them. Why would they do that? To earn your business, first of all. Also, because the lender offers a slightly higher-than-market interest rate and uses the proceeds from that rate to pay your fees.
At today’s rates, consumers are getting a much lower rate, and doing it with no out-of-pocket fees, and no additional balance added to their loan.
For these homeowners, there’s no reason not to refinance.
2. Converting A 30-Year Loan To A 15-Year Fixed
Rates are low for 30-year fixed mortgages, but even lower rates can be had for short-term loans like the popular 15-year fixed mortgage.
Homeowners want to pay off their loans faster and own their homes outright sooner. This loan helps them do that.
Typically, refinancing into a shorter term means you pay a lot more per month. This might not be the case at today’s rates.
The below table demonstrates payment changes with a typical 150-basis-point (1.5%) drop associated with converting a 30-year loan to a fifteen-year one. For instance, if a homeowner has a 30-year rate of 4.5%, and it drops to a 15-year rate of 3.0%, this is what they can save.
|Loan Amount||Payment Increase||Lifetime Interest Savings|
Even homeowners who already have a low 30-year fixed rate can benefit by cutting years off their mortgage. The lifetime savings are enough to draw out even homeowners who never thought they would refinance again.
3. Trading In An Adjustable Rate For A Fixed Rate
An adjustable rate mortgage (ARM) makes sense for the right kind of home buyer.
They offer ultra-low rates, fixed for a set period of time, during which the homeowner pays very little interest. These loans are perfect for those who plan to stay in the home only a few years, refinance soon, or pay off the mortgage quickly.
But plans often change, and when they do, homeowners can refinance from an ARM to a fixed rate loan.
Today’s fixed rates are lower than ARM rates of just a few years ago.
A homeowner today can secure a rate for 30 years, which provides them flexibility to keep the home long-term or otherwise keep the mortgage longer than they expected.
Low fixed mortgage rates are the perfect opportunity for homeowners to lock in affordable payments permanently.
4. Refinancing An Underwater Loan Before HARP Expires
More than 3.4 million households are now paying less on their mortgages after using the Home Affordable Refinance Program (HARP). The program allows homeowners to refinance even if they owe more than their home is worth.
But more than 300,000 homeowners are still eligible according to a government study.
The program expires at the end of 2016. For remaining HARP-eligible homeowners, today’s rates come at a perfect time.
To be eligible for HARP, the homeowner must have purchased their home before June 2009. According to Freddie Mac, homeowners who purchased a home at that time probably have a mortgage rate between 5.5 and 6.5 percent.
Today’s rates let those homeowners cut their rate nearly in half. According to Freddie Mac, mortgage rates have fallen below 3.5%.
What does this mean in monthly savings? A homeowner with the typical mortgage amount would save $450 per month by dropping their rate 300 basis points (3.0 percent). A refinance applicant with a larger-than-average loan amount would save even more.
Payment reductions like this can allow a homeowner to start an investment account, buy a car, pay off loans, and accomplish financial goals they didn’t think were possible.
5. Retiring A HELOC Or Second Mortgage
Homeowners are consolidating variable-rate and high-interest second mortgages into one low-rate loan. And they’re doing it in increasing numbers.
According to Freddie Mac, households have consolidated 20 billion dollars’ worth of second mortgages in the past year alone.
Consolidations refinances are similar to a standard ones. The main difference is that you increase your requested mortgage amount to include your second mortgage or home equity line of credit (HELOC). The new loan pays off and closes the second mortgage or line of credit, and you are left with one, low payment each month.
Lenders will consider the new loan either a rate-and-term refinance, or a cash-out refinance. A cash-out refinance comes with a slightly higher rate than does a standard refinance.
To qualify for rate-and-term refinance rates, the second mortgage to be paid off must meet the following guidelines.
- The HELOC was used in full to purchase the property
- No additional funds have been drawn on the HELOC
Now is an ideal time to consolidate a HELOC. Many home equity lines were taken out ten years ago, and are about to reset. Homeowners will go from making interest-only payments to full principal and interest payments on a 20-year payoff schedule.
This could raise the monthly HELOC payment by a hundred dollars or more per month.
Homeowners who have had a HELOC for some time should call the issuing lender and verify upcoming payment terms.
Or, simply refinance it into your new mortgage, and never worry about your second mortgage again.
6. Consolidating Debt With A Cash-Out Refinance
Many U.S. households have experienced home appreciation at break-neck speeds.
Homes purchased just a few years ago have already seen values increase by 20 to 30 percent in many areas of the U.S.
Now homeowners are thinking about tapping into that equity with a cash-out refinance, and, at the same time, reducing their mortgage rate.
It’s true that cash-out refinances come with slightly higher rates than do standard “rate-and-term” refinances — loans whose only purpose is to drop the rate or change the length of the loan term.
But cash-out loans typically come with rates only about 0.125% higher than rate-and-term refinances for borrowers with credit scores above 700. And the payment reductions for paid-off items can be massive.
The below table compares payments of an individual with a mortgage, auto loan, and credit card debt, before and after a cash-out debt consolidation mortgage.
|Mortgage||Rate||Payment||Auto Loan||Credit Cards||Total Payments|
Homeowners are using current mortgage rates to optimize their budget, get rid of high-interest debt, and lower their rate at the same time.
7. Getting Rid Of Mortgage Insurance Forever
Millions of Americans today carry mortgage insurance. Many of them hold onto it needlessly.
As home values rise, more homeowners approach the coveted 20% equity mark. This is the point at which you can cancel your mortgage insurance.
Getting rid of mortgage insurance forever is as simple as refinancing, for many homeowners.
Households today typically have one of two types of mortgage insurance.
- Private mortgage insurance (PMI) for a conventional loan
- FHA mortgage insurance premiums (MIP) issued with FHA loans
Either type is cancellable with enough equity, through a refinance.
When you refinance, your former loan type and original downpayment is forgotten. Your new lender takes a snapshot of your current equity position, not your original one.
In other words, just because you needed mortgage insurance when you purchased your home doesn’t mean you need it now.
The first step is to check your estimated current value. A local real estate agent or mortgage professional can give you a ballpark figure. If you are close to 20% equity, apply for a conventional loan, which is simply a loan offered by nearly every lender in the country, and approved by Fannie Mae or Freddie Mac rules.
The lender will order a new appraisal, which is the tangible proof of your home’s value. If you have adequate equity, you refinance into a new loan, at near-record-low rates, and walk away with a lower rate and no mortgage insurance.
This strategy can work, too, if you have 10 to 15 percent equity. Anyone who purchased a home with an FHA loan after June 2013 will pay mortgage insurance for the life of the loan. Convert that FHA mortgage into a conventional loan with PMI, and you can cancel that PMI when you reach 20% equity.
More homeowners are cashing in on the perfect combination of rising home values and low mortgage rates to retire their mortgage insurance policies forever.
8. FHA Refinancing With No Appraisal & No Paystubs
Today’s mortgage rate market presents a rare opportunity for FHA homeowners.
The FHA streamline refinance is an FHA-to-FHA refinance that drops the applicant’s rate and payment with no appraisal, and very little documentation.
Most refinances require pay stubs, W2s, and sometimes even tax returns. FHA streamline applicants skip that step and get to saving on their mortgages — fast.
FHA homeowners also skip the appraisal process, saving upwards of $500 in closing costs, and making their current home value a moot point. They can refinance even if they owe more than their home is worth.
Home buyers who purchased just one year ago probably have a rate of about 4.24% if they opted for an FHA loan, according to loan origination software company Ellie Mae.
Now, FHA mortgage rates can be had at nearly 100 basis points (1.0%) lower, from many lenders. That kind of rate reduction means life-changing savings over the duration of the loan.
9. Using The VA IRRRL Program For Streamlined Refinancing
VA home loans have made the transition from obscure home buying program to a dominant player in the market.
Since the start of the decade, more than 1.2 million active military personnel and veterans have purchased homes with a VA home loan.
Now that rates have dropped, most of them could save money with a refinance.
Except for a brief period at the end of 2012, VA mortgage rates are lower than at any time this decade. Veterans are taking advantage of low VA IRRRL rates in droves.
That acronym stands for Interest Rate Reduction Refinancing Loan; it’s the easiest refinance type to qualify for in all of the mortgage market.
Among other benefits, the VA IRRRL program requires:
- No income verification
- No bank statements
- No appraisal
- No mortgage insurance
Plus, applicants with credit scores down to 580 can qualify with some lenders.
This VA loan refinance program is meant to give VA loan holders access to low rates without the documentation needed for other refinance loans.
With a refinance so easy, and today’s mortgage rates near all-time lows, veterans and military personnel have very little reason not to refinance.
What Are Today’s Rates?
Current mortgage rates are drifting downward, with almost nothing opposing the forces of “gravity.”
Now is the time to refinance into a low rate. Get a quote and lock in before rates decide to change direction.