Low Rates Spur Increase in Applications for Mortgage Refinancing
The New Year brought with it a little financial relief for consumers. Interest rates for a fixed rate 30 year mortgage were the lowest in decades, well below 5 percent. The low rates have resulted in an increase in applications for mortgage refinancing. A survey released by the Mortgage Bankers Association shows that applications for mortgage refinancing were at a five year high. Those homeowners are hoping to take advantage of the lower rates before they go up again.
Many real estate analysts have called the flurry of mortgage refinancing activity a "mini boom." They claim the boom would be bigger, if it were not for decreases in home values and stricter lending standards. Some homeowners no longer have enough equity to qualify for mortgage refinancing, due to lower home values. In Ventura County in California, for example, it is estimated that of the properties purchased there within the last five years, about 40 percent are now worth less than their purchase prices. The higher credit scores and spotless credit records now required for mortgage refinancing mean that fewer consumers now meet the standards. A minimum of 700 is the credit score bar for many banks now.
Many financial analysts believe that interest rates will remain low the next few months, since the federal government agreed to purchase $500 billion of mortgage backed securities in the hopes that it would spur lower lending rates and encourage consumers to take on new mortgages. It would be wise to get the ball rolling, if you are considering mortgage refinancing. The general rule is that if the interest rate is 1 percent lower than your current rate, then it would be wise to undergo mortgage refinancing. It is, however, more important to look at your particular situation and determine if the cost and savings over the time you intend to own the mortgage makes sense. The first step is to figure out how much you would save each month with the new interest rate by subtracting the new estimated monthly payment from the one you make now. Tally up the actual mortgage refinancing costs, such as an appraisal, lawyer and documentation fees and other closing costs. Divide your refinancing costs by your estimated monthly savings. This total (given in months) will tell you when you will make up the costs of the refinance and start seeing savings each month, also known as when you will break even. If your break even point is longer than the time you expect to own the property, then it may not make sense to undergo mortgage refinancing.
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