Is this a good time to refinance?

Photo courtesy of Thetruthaboutmortgage.com/Flickr

With mortgage rates hitting record lows, and property values declining in tandem, this may be one of the best times to refinance in order to lower monthly mortgage costs.

This week, the Mortgage Bankers Association (MBA) reported that the refinance index increased 5.7 percent for the week ending August 20,2010 , the highest level reported since May 1, 2009.
“The volume of [refinance] applications last week was up 26% over their level four weeks ago.  Mortgage rates dropped to their lowest level in the survey, going back to 1990, as incoming data continue to indicate that economic growth has slowed,” said Michael Fratantoni, MBA’s Vice President of Research and Economics.

“We are at a new 15-month high for the Refinance index.  With rates this low, many borrowers who refinanced in the past two years may well have an incentive to refinance again, and this is likely increasing [refinance] application activity.”

It seems that refinancing is a bright spot in an otherwise crippled housing market. Existing home sales dropped 27 percent in July, while new home sales fell by 12 percent during the same period.
The increased demand for refinancing has driven mortgage activity for the prior week. Refinancing now comprises 82.4 percent of total applications, the highest share observed since January 2009, according to MBA.
“Yes, sure, it’s a great time to refinance” says Keith Stewart, a mortgage consultant at Northpoint Lending Group Inc. “Everybody’s situation is unique to themselves, their credit score and whether they are able to make income documentation, which were modified to Fannie Mae guidelines. They’ve tightened a lot of the guidelines.”
With the fluctuating downward spiral of property values, a lot of people are at par or under value — “under water” in housing crisis parlance – on their mortgages. That’s where Fannie Mae steps in with its new modified guidelines, which allow you to refinance when you never could.
Under Fannie Mae’s stated terms, it’s possible to refinance with less than a 20 percent downpayment, or an outstanding loan balance that is over 80 percent of the home value. Theoretically,  this should make it easier for homeowners to borrow more easily.
However, Stewart cautions that refinancing at these incredibly low rates must be taken with a grain of salt. If you are considering refinancing, be aware that additional fees will be added to begin the process, such as title insurance, appraisals and bank fees.
“By the time they incorporate all those hits [price adjustments], the advantage in refinancing gets eaten up. It’s not the case with everybody, but it’s the case with a lot of people.” Stewart also noted that having a high credit score is essential to getting a low mortgage rate, with a credit score of 740 or above being optimal.
Another thing to consider is how long you plan to stay in the property. Nick Helmer, managing agent at the Institute of Real Estate Management (IREM) says most people don’t stay in their first homes for more than seven to ten years.

“The issue is always ‘What does it cost me to do that?’ Helmer says. “It doesn’t make sense to take on a lower rate if you’re not going to be there long enough to get back what you were paying” in closing and other costs.

The situation becomes even trickier when property values are declining so rapidly. Helmer says that problems arise when property values decrease so much that “the value of the home is less than what you paid for, and your equity is wiped out.”
The majority of refinances will be rate-and-term, which ensures you are refinancing on the existing term amounts.

The other main type of refinancing popular during the housing boom was cash-out refinancing — possible when values are going up and when homeowners have equity on their houses, to pull out cash for payments.  Needless to say, this currently is not the case.

Probably most glaringly, the unemployment situation is a huge determining factor to decide whether to refinance. With unemployment rates still hovering at 9.5 percent, the lower mortgage rates still may not be enough to persuade homeowners to refinance if they are not maintaining a steady stream of income.

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