Refinancing Rates Remain Low But For How Long
If you finished out 2015 debating whether or not to refinance your mortgage, you may have experienced a moment of panic when the Federal Reserve Board raised the federal funds interest rate last December, with promises of more to come in 2016. Don’t fret quite yet, however — mortgage rates continue to hover near at all-time lows in the Fox Valley, say local experts.
“The Federal Reserve Board met and raised the federal funds rate 0.25 percent [in December], and are expected to raise the rate again in 2016,” says Kristopher Peterson, mortgage loan officer with Anchor Bank. “This did not have a large effect on our current mortgage rates. We are still near all-time lows.”
Alex Krukowski, mortgage lender with Prospera Credit Union, says he’s seen only a slight effect as well.
“I have seen only a small increase in the fixed mortgage rates, only about 0.125 percent,” he said. “I have not seen a major effect on adjustable rate mortgages yet.”
Inevitably, the rates will go up at some point, adds Peterson.
“With the prime rate going up, it might happen sooner rather than later, even though we haven’t seen it happen yet,” he said. “If you are on the fence or thinking about refinancing, I would think the sooner you do it, the happier with the rate you will be.”
And while the rates are low, there are several other factors that need to be considered before refinancing, cautions Krukowski. He says it’s important to explore your personal situation with a trusted lender.
“I wouldn't necessarily say that it's an ‘end-all, be-all’ refinance for everybody,” he said. “It’s really something to take case by case, dependent on the individual's situation.”
Peterson says he asks about clients’ end goals when they inquire about refinancing. While everyone wants the lowest rate — coupled with the lowest payment — it’s important to look at the homeowners’ actual need.
“Are they trying to get a lower monthly payment?” he asks. “Are they trying to pay less interest over the term of the loan? Are they in need of consolidating debt? Are they helping their kids pay for college? Can they make more money through investments than they would be paying on these low mortgage rates? There are many reasons to refinance — which one is needed or would benefit my clients? That’s my job — to find out what they need, and see if refinancing would make sense for them.”
Increased property values across the country are also helping those homeowners interested in refinancing, Peterson said. He says there are two overall types of refinances — rate and term, and cash out. Rate and term refinancing involves only refinancing what you owe on your current mortgage. Cash out refinancing means you are using your available equity in the property to pull out cash for a specific reason.
“If you are doing a rate and term refinance, the value of the home might have increased and your loan amount would be staying the same, the result is a lower Loan To Value (LTV), which is the loan amount versus the actual property value," Peterson explained. "The lower the LTV, the better. In some cases, it can eliminate Private Mortgage Insurance (PMI), which is required on most loans that have a greater LTV than 80 percent.
“If you are doing a cash out refinance, then the higher the value of the home, the more available equity you have at your disposal to use as you wish. For example, many people use this to remodel their home, pay off debt, help a child with college, or go on a vacation.”
Some homeowners may be tempted to reduce the payment amount each month by lengthening the term of their new loans. But Krukowski usually advises against that, unless there's a good reason, like cash-flow problems or other debt that has gotten out of control.
“Maybe they need to focus on paying down credit cards, or doing something along those lines,” he said. “And if they can still get a good interest rate, lengthen their term, reduce their mortgage payment and become more financially fit elsewhere, that could be a good opportunity to do that.”
It may also work to the homeowners’ advantage if they are looking to sell their home in the near future, he adds.
“If you're going to sell in the next two to three years and you want to start building up your savings for a down payment on the next home, then that might be another good idea. You will reduce your monthly payment as you plan and prep for the next home you're purchasing.”
However, as Krukowski explains, even if the homeowner is taking advantage of the lower interest rates during a refinance, kicking the term back out another 30 years may cause them to pay back more interest in the long run.
“Unless it's a situation where there are some affordability issues, and you really need more cash flow coming into the home, then it's in the members best interest to stick with that payment,” he said. “Generally, I don't advise people to kick that term back out unless there is a good reason.”
While it’s enticing for the moment, lower interest rates – and the promise of another rise in federal fund rates soon – don’t always mean that refinancing makes sense, reiterates Peterson.
“If the clients have only a small amount remaining on their mortgage, it might not make sense,” he said. “However, it might be in their best interest. I would want to talk to my client about their situation, along with their overall financial goals, and then make a professional recommendation."
By Meghan Diemel, For USA TODAY NETWORK-Wisconsin
Author: Victor DeFrisco
March 21st 2016
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