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Buying or Refinancing a Home? Read This

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:

While the 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 hikes.

 

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.

Why are rates rising? Can they come back down?

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.

How to know if refinancing is worth it

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. Example:

  • 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 idea:

1. Lower your monthly payment

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 for You.”)

2. Get rid of your mortgage insurance

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 mortgage insurance.

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.

3. Lower your mortgage insurance 

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 cuts.)

4. Extract cash 

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.)

5. Pay off your home faster

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.

BY Marilyn Lewis - To view the original article click here

Posted by Jackie A. Graves, President on December 7th, 2016 4:59 AM

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