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Thinking About Refinancing

With mortgage rates bouncing around like a child's plastic yo–yo, pulled down by government intervention in the housing market and yanked back up again by a strengthening economy, experts say now is the moment for homeowners to refinance. Homeowners have been spoiled over the last decade with historically low mortgage rates. But that's about to change, now that the market is believed to be bottoming out. "We're probably at the trough, or not far from the trough, in terms of rates," says Sam Khater, a senior economist with First American CoreLogic. "Any time rates are in the 5% range they are very low relative to history. We forget that the longer term average for a 30-year fixed is 7%."

Among the homeowners who should seriously consider refinancing now are folks who are in the unusual situation of holding an exotic adjustable-rate mortgage or ARM, that is currently clocking in at rates as low as 3%. Another group who should act now: homeowners with option ARMS that are due to adjust in the next two years, says Greg McBride, a senior financial analyst at Bankrate.com. While refinancing now might seem counterintuitive, it can help these homeowners from adjusting to much higher rates next year. "Doing that for many borrowers will mean trading away a very low rate for a higher rate right now," McBride says. "A lot of people, they will say 'Wait a minute, why trade in a rate at 3.5% for one at 5.5%?' Well, you're trading away a 3.5% to lock in at a 5.5%, so you're 3.5% doesn't turn into a 7.5% a few years from now which is very possible." It's difficult to say how many borrowers have adjustable rate mortgages like these, although statistics show that the dollar amount of these loans that are scheduled to reset over the next few years is as high as $20 billion a month, says McBride. Some buyers understand the high stakes in the mortgage interest rate guessing game. David Shaw, the chief executive officer of Quantum Health, recently refinanced the interest only mortgage on his three-bedroom, two bath, 1,577 square foot home near Venice Beach. Calif. to avoid paying higher rates when it adjusted a few years from now. "I had a five-year-interest-only" loan, Shaw says, "and thought that since rates are very low now, but would be going up soon, I'd be better off with a 30-year fixed. I got it at 4.75%." Like Shaw, many folks are already looking to cash in on historic low rates, with mortgage purchase applications increasing last month to their highest level since last Halloween. Many homebuyers are rushing to close loans before the expiration of the government's homebuyer tax credit program this month. But what the government giveth it also taketh away. As rates ticked upward in early April, the federal government ended a program to buy loans from mortgage giants Freddie Mac and Fannie Mae, according to a weekly survey by the Mortgage Bankers Association. This massive infusion of cash into the market helped drive rates to their lowest level in three decades. Now that the cash is drying up rates are expected to rise.

Another group that should refinance sooner rather than later are homeowners with "underwater" mortgages that owe more on the loan than the home is worth. Ideal candidates for refinancing are those who plan to stay in their homes for at least two to four years and who have "reasonable equity" of around 10%, together with an interest rate north of 6.6%, said Keith Gumbinger, a vice president at HSH Associates. An expansion of the federal government's Home Affordable Modification Program announced last month allows investors to refinance these borrowers into loans backed by the Federal Housing Administration. There are several steps homeowners should take if they're considering refinancing. If prices in your area have already tumbled and there's more than a six-month supply of homes on the market, analysts say it's not worth waiting for even lower rates because lagging values are likely to drive down your equity further. Bankrate.com offers a search engine to uncover the lowest interest rates in your area and what terms are required to qualify. The web site also has calculators that allow homeowners to figure out how making the change from an adjustable to a fixed rate mortgage would impact their monthly payment. Even those who are underwater and there are many, with one in four of the nation's homeowners currently owing more on their home than it's worth may qualify for a refinancing by taking advantage of the federal government's loan modification program. Even those who are underwater--and there are many, with one in four of the nation's homeowners currently owing more on their home than it's worth may qualify for a refinancing by taking advantage of the federal government's loan modification program. To find out if you may qualify, visit MakingHomeAffordable.gov.

Many homeowners have already jumped on the refinancing bandwagon. Over three million of them took advantage of federal programs--and the lowest average annual mortgage rates since reliable tracking began in 1971 in 2009. Borrowers who have refinanced have typically saved $108 a month in mortgage payments, according to a report by First American CoreLogic. Kevin Wolf, the public relations rep says he didn't start the refinancing process sooner because he was concerned his home would appraise for less last year and he wanted to wait to finalize this year's taxes. He hopes to save at least $500 a month on his mortgage which will come in handy with two kids in school starting this fall. "Priority number one is to lower monthly payments," Wolf said. "With rates low and likely to climb, I figure now is the time to re fi."

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