Mortgage Refinancing - Is Now A Good Time?
If I had tried to answer this question even a month ago, my advice would have been, “Yes, refinance into the lowest fixed rate available. Buy down your rate if you’re able to do it.”
Given the changes in the mortgage market since then, my advice has changed as well. Yesterday’s announcement by Countrywide that it will refinance borrowers with adjustable rates, even though they don’t qualify, just made it more difficult for the vast majority of homeowners who are making their payments on time. It’s also punishing homeowners that took out fixed rate loans as downward pressure on the bond markets is making new loans less expensive than old ones.
If this were a one time occurrence, I would advise everyone to go out there and refinance to take advantage of it. However, it appears
right now that rates will be trending down for some time. The Fed has room to play and can push rates down all the way to zero if they need to. We’ll see next week how well this theory holds up when the Fed meets on Halloween.
Strategies for refinancing now -
Overall, we’re very much in wait and see mode. Only those homeowners with compelling reasons to refinance should attempt to do so right now. What are compelling reasons?
1. Rate resets on adjustable loans - If your loan is resetting to a higher rate, you should refinance. Homeowners in Salt Lake are fortunate because values have risen and many with 100% financing will now see their loan to values drop and therefore their interest rates will too.
2. No fee rates being lower than existing rates - If you can refinance using a “no-fee” loan and the payment is lower than what you’re paying now, it would be wise to consider it. No fee loans have higher rates than standard loans, but if the new rate is lower it often makes sense, especially in a declining rate market.
3. You need to extract equity - If you are in a financial position where you need to take out some equity from your home, you should consider a cash out refinance. This is a very touchy subject because lenders are avoiding cash out loans considering the decline in home prices. It is difficult, but not impossible to get this kind of loan. Secondly, borrowing your equity is not free money. If your home declines in value at the time you sell, you’ll be on the hook for the amount you borrowed. This should only be done if absolutely necessary.
4. 100% financing - In Utah, if you bought a house between 2003 - 2005 and used 100% financing, now is a critical time to refinance. Your home has increased in value and you may be able to get favorable rates and eliminate your 2nd mortgage or home equity line.
If your situation doesn’t fit into the previous four scenarios, hold tight. In fact if you got a fixed rate loan in 2003 or 2004, you’ll probably never even have to consider a refinance. Hold on and lets see where this rate train takes us.