Why Now is a Good Time to Think About Refinancing

• January 20, 2015

by Lark Turner

In recent weeks mortgage applications have shot up, driven mostly by a 66 percent increase in applications from homeowners looking to refinance.

So what are the reasons for the increase? Here’s a big one: interest rates have stayed low into 2015, despite now-debunked predictions that they would start heading upward in the latter half of 2014. Last week’s 3.66 percent was the lowest level long-term rates have been since May 2013.

A general rule of thumb is that when rates are a half-point or more below what a homeowner originally financed at, it could be worthwhile to consider refinancing. (Here’s a good calculator if you’re looking into it for the first time.) Ryan Dailey, a lender with Prosperity Home Mortgage, said he’s seen an uptick in refinancing inquiries in recent weeks, and noted that simple math won’t entirely answer the refinancing question for homeowners.

Dailey said any lender will have two big questions for a client: What’s your home worth? And when do you plan to move? Both questions demonstrate the pitfalls an eager-to-refinance homeowner may face. First, it’s not free.

“Refinancing inherently has costs,” Dailey said. “There’s going to be an appraisal and more fees. Do the monthly savings outweigh the cost, and at what point do you break even?”

That break-even point gets to the next question — the tough one about how long you plan to stay in your house. Generally, Dailey said, if you plan to leave in a few years, it probably doesn’t make a lot of sense to refinance. If you’re in it for the long haul, though, now may be a very good time.

There’s also a no-cost refinancing option, where a buyer could move to a lower rate while receiving a lender credit to pay off their fees. The lender is incentivized because the rate is actually a bit higher than “market rate,” though likely lower than what the homeowner is paying. This option may make sense for a homeowner who’s planning to move out soon but wants to take advantage of lower rates. You won’t get the lowest possible rate, but you’ll still be saving money every month.

And rates are just part of the story. Homeowners with FHA and conventional loans are also eligible to refinance with an FHA loan on homes worth up to $625,500. For the first time in a while, FHA loans are looking good after the agency announced cuts on the product’s mortgage insurance. The cuts make the loans a viable option for buyers who normally wouldn’t consider them given the pricey insurance rate. That may make refinancing attractive even without a significant rate drop, Dailey said.

“Even if the rate is the same or slightly lower, if you can snag the new mortgage insurance it’s going to make the payments markedly lower,” he said. “Basically, it’s making FHA attractive again.”

This article originally published at http://dc.urbanturf.com/articles/blog/why_now_is_a_good_time_to_think_about_refinancing/9428