December 7th, 2016 4:59 AM by Jackie A. Graves, President
Whether you’re thinking of buying a home or
refinancing one, you need to take a fresh look at the mortgage market.
Rates recently took a huge jump and the lowest rates in modern history may soon
be a memory.
Rates for a 30-year fixed-rate
mortgage had been around 3.5 percent, but in just the last couple of weeks have
now climbed to over 4 percent.
Doesn’t sound like much? Well, if
you’re borrowing $300,000, that half percent will cost you an extra $85 a
month. Over 30 years, that’s more than $30,000; enough to retire a year earlier
or put a kid through college.
And it gets worse. As I write
this, the odds of a Federal Reserve rate hike in mid-December are now 100
percent, according to the futures market. While mortgage rates are
set by the market, not the Fed, these rates, along with rates on everything
from credit cards to car loans, often move in lockstep. And the December
central bank rate hike will probably not be the last. A recent article from CNBC quotes
Wall Street’s Goldman Sachs as predicting higher rates in 2017:
U.S. central bank’s current forecast is for two rate hikes next year, Goldman’s
projection calls for the Fed’s short-term rate target to rise by 100 basis
points, or a full percentage point — the equivalent of four quarter-point
Again, the Fed funds rate isn’t
directly tied to mortgages. But should mortgage rates rise a full percent next
year, from today’s four percent to five percent, that would increase the
monthly cost of a $300,000, 30-year loan by an additional $178 per month, or
$64,080 over the life of the loan.
Rates are rising for several
reasons. Inflation is ticking higher as wages rise and the
economy continues to show improvement. President-elect Trump has promised to
cut business regulation and taxes, while spending more on defense and
infrastructure. If these things materialize, the economy will grow further,
fueling higher inflation, bigger potential government deficits and higher
interest rates. These are the reasons both the stock market and interest rates
have recently been on the rise.
Will this trend continue? That’s
impossible to know, but at least for now, the smart money is suggesting the
path of least resistance for interest rates is up.
Will you come out ahead if you
refinance? The devil is in the details.
Refinancing to a lower rate
lowers a monthly mortgage payment, but it’s only worth it if the
month-to-month savings exceed the cost of refinancing. In short, it’s not worth
it unless you stay in the home until you’ve saved more than you paid.
Your break-even point is fairly
simple to compute: Just divide your total refinance costs by your monthly
savings. The result will be the number of months it will take to break even.
Total cost to refinance: $2,000 (This includes all expenses and fees, from the initial
appraisal to the final closing costs.)
Monthly savings from lower rate: $100
Months to break-even: 20
In this example, if we plan to
stay in the house for more than 20 months, the refinance will pay for itself.
If not, we’ve endured the hassle of refinancing and lost money doing it.
If computing your break-even
yourself is too much trouble, you can also plug the information into an
online calculator like this one.
Here are five reasons why refinancing your mortgage might be a good
A lower monthly mortgage payment
is always welcome. Refinancing to a lower interest rate should drop your
payment, although the details depend on your loan amount, your credit score and
other factors. (Bone up on mortgage basics by reading “Home Buying 101: How to Choose the Best Mortgage Option
If you bought your home with a
down payment smaller than 20 percent of the purchase amount, you
probably were required to buy mortgage insurance. (It protects your home’s
lender, not you.) Private mortgage insurance (PMI) charged on conventional
loans can cost 0.5 percent to 1 percent of your loan’s value. Federal
Housing Administration (FHA) mortgages include mortgage insurance, too.
PMI adds $41.50 to $83 a
month to your payment for every $100,000 of your mortgage. With
FHA mortgages and some conventional loans, you have
to pay mortgage insurance for the life of the loan;
refinancing is the only way out.
However if you have 20 percent
equity in your home when you refinance — whether through your
payments or from appreciation of your home’s value — you won’t need
Check with your lender to see if
your payments have exceeded 20 percent of the loan value. To
figure your equity from an appreciating housing market, estimate the
current value of your home. Three tips:
Research just-sold listings online for properties near
yours and like yours. Two sources: Realtor.com’s Just Sold section and the
“Recent Home Sales” under the “Buy” tab on Zillow.
You can also look up your county tax assessor’s valuation of your
home, although it may not accurately reflect the market value.
Don’t take estimates of your home’s value on real-estate
websites too seriously; they can be way off.
Even if you can’t totally get rid
of PMI, you might lower your monthly cost since the Federal Housing
Administration last year dropped the rate on annual mortgage insurance
premiums from 1.35 percent to 0.85 percent.
The White House, in announcing the cuts last year, estimated
that they would mean an average savings of $900 a year for homeowners
who refinance and for first-time home buyers. But the rate cuts are effective
only on newer loans so you must refinance to get a lower rate. (HUD answers questions here about the rate
Home values have been rising, and
nationwide are now surpassing the 2006 peak reached in the housing bubble.
That means you may have more home equity. One way to
tap it without selling your home is to refinance and take out cash.
(You could, instead, get a home-equity loan, a line of credit or, depending on
your circumstances, a reverse mortgage.)
Rates are so low now that,
depending on the interest rate you qualify for and your current monthly
payment, refinancing into a 10-, 15- or 20-year mortgage could increase your
payment only a little yet save you tens of thousands of dollars in the long run
by allowing you to pay off your mortgage faster. You can see
current mortgage rates in your area here.
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