Why It May Be Time to Refinance Your Loan
An excellent Article in the Wall Street Journal recently.
My thoughts first:
Refinancing provides great opportunities for homeowners. Through refinancing, it may be possible to lower your monthly mortgage payments, enjoy the security the security of a fixed-rate mortgage, as well as to consolidate other debt to a lower interest rate and a single payment.
- All-time low rates
- Government programs that may help current homeowners in specific situations
- Possible streamlined refinancing for qualified borrowers
- No closing cost refinance options
Mortgages: Why It May be Time to Refinance Your Loan
By Nick Timiraos – Wall Street Journal
With the Federal Reserve out of the mortgage market and the economy gaining strength, some economists are warning that mortgage rates, still near historic lows, will soon start rising.
That presents a tough choice for borrowers with adjustable-rate mortgages or home-equity lines of credit: Should they trade their low-rate loans for more-expensive fixed-rate loans? Or should they stick with a cheap rate and gamble that it won’t adjust sharply higher?
The answer depends on how long borrowers plan to live in their current home and how much interest rates are going to rise. Those who plan to move in a few years probably don’t need to lock in a fixed rate unless they think rates are bound to jump.
Mortgage rates already have ticked up a bit since the Fed ended its purchases of mortgage-backed securities a week ago. Average 30-year fixed mortgage rates stood at 5.20% on Thursday, down from 5.32% on Monday but still up from 5.18% a week earlier, according to HSH Associates. The Mortgage Bankers Association calls for rates to rise to 5.8% by year end, a level unseen since November 2008.
Adjustable-rate mortgages, or ARMs, have been hovering around 4% or even lower. Many offer fixed rates for an initial three-, five-, or seven-year period before resetting annually. ARMs are tied to short-term interest rates, and rise when the Fed increases the federal-funds rate. The financial markets are betting on the Fed to start raising rates by the end of this year. The question is how high those rates will go. No one knows.
If the Fed boosts rates by two percentage points, it would bring adjustable-rate mortgages into rough parity with today’s fixed-rate mortgages. But waiting for the Fed to raise rates all the way to there could be risky, because fixed-rate loans could rise, too. The question boils down to taking guaranteed pain now or risking even more pain later.
The decision turns on how long borrowers plan to live in their houses. “If your ownership period is less than three years, you’re on pretty good grounds to gamble and avoid the closing costs of a refinance,” says Lou Barnes, a mortgage banker in Boulder, Colo. Closing costs average 2% to 3% of the loan amount.
Borrowers who plan to live in their homes for the long haul may be better off refinancing into a fixed rate. Greg McBride, senior financial analyst at Bankrate.com, says he is worried that many ARM borrowers have their “heads in the sand” and won’t refinance to fixed rates, which are still near historical lows, because their current variable rates are even lower. If rates spike, it could come as a nasty surprise.
Borrowers with home-equity lines of credit, or HELOCs, also have a decision to make. HELOCs have been a great deal in recent years, with rates often below 4%. The rates on many of those loans reset every month. But the rates on fixed loans are higher, ranging from 5.5% to 8.5% right now.
If borrowers think the adjustable rate will jump higher than that fixed rate and will stay higher, then they should lock in. But it is a gamble. “You’re going to pay more to convert,” says Bob Walters, chief economist at Quicken Loans. “The question is, what do you think is going to happen to short-term rates?”
Swapping a HELOC for a fixed rate has other drawbacks. It can require higher monthly payments because most loans will begin amortizing, or requiring principal and interest payments, typically on a 10- or 15-year term, while a typical HELOC will allow borrowers to make the interest payments only for a certain period of time. And homeowners with unused credit lines may have to forfeit the chance to tap any remaining credit.
Pete Ogilvie, a mortgage broker in Santa Cruz, Calif., is leaning toward switching the $60,000 balance on his $180,000 HELOC to a fixed rate. He remembers when rates on that loan rose quickly from 4% to 7% a few years ago and says “that could be happening again now.”
Still, because of the high fixed rate that his lender is likely to charge, he says it is a decision he would make “very reluctantly.”
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