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When considering the refinance of a current mortgage, many homeowners choose to wait, anticipating that interest rates will decline further. In fact, rates are low now and numerous influences can cause them to rise.
Given the low rates and relaxation in lending guidelines, borrowers have the best opportunity to change their loan terms for the better if they do not delay. Waiting could result in unexpected–and unwanted–changes in personal finances and the overall economy. By then, a profitable refinance might well pass well-intentioned borrowers.
For homeowners seeking to lower their monthly mortgage payments, there is no time like the present to refinance. Yes, the prospect of interest rates descending is often a loud voice cautioning patience. After all, if the point is to improve household cash flow, why not wait for the lowest rate possible? Unfortunately, interest rates have a way of defying expectations. In addition, when rates do fall precipitously, it could signal trouble in the general economy. If these facts are not enough, it is wise for borrowers to remember that a bank or lender is not obliged to lower rates.
When an individual or family is approved for a mortgage loan, they are offered a rate by the bank that, in part, reflects the institution’s confidence in a long-term relationship. Accordingly, the lender considers how much money the applicant wants; credit scores and income; the location and condition of the collateral; the size of the down payment or level of equity in the property; the type of loan, IE. fixed-rate, adjustable, conventional or government-backed; and the requested term for pay back. Needless to say, underwriters do not just pull the rate out of a hat. All kinds of variables come into play.
Of course, all this is predicated on the prime rate. Also called the prime lending rate, this figure is set by the Board of Governors of the Federal Reserve System, and is essentially the best rate any lender can offer a customer. Just as bank rates are influenced by several determinants, the prime rate is decided upon based on multiple considerations, including:
A key idea to keep in mind is that these decisions are just as much art as they are science, sometimes more so. The philosophies of the various governors who comprise the Fed color their judgments in any of the indicators noted above. Unless a borrower has years of financial analysis under the belt, he or she will take advantage of low rates while they last.
Another compelling reason to act now with regard to refinancing is the recent relaxation from the draconian credit standards adopted after the 2007-2008 banking crisis. In the aftermath of that period — aggravated in part by previously exuberant investments in bad mortgages — financial institutions embraced more rigorous standards for loan approval. Standards for proof of income and equity levels, among other requirements, were raised in order to prevent a repeat of the credit debacle.
In the last few years, the Mortgage Credit Availability Index (MCAI) has inched up, meaning that the current rules are admitting more applicants as qualified borrowers. This figure put out by the Mortgage Bankers Association, focuses on private-sector mortgages that accommodate the guidelines of the largest investors like Fannie Mae and Freddie Mac.
For example, loan-to-value (LTV) ratios are higher now. This means that the owners’ equity need not be as high as once demanded. In the same vein, debt-to-income (DTI) ratios are also higher, meaning that borrowers can carry more obligations and still be eligible for loan credit. Yet there are no assurances that these loosened rules will remain in place. Refinancing now is the way to capitalize on the current favorable regimes.
If your financial condition qualifies you for a conventional refinance, there is every reason to refinance now. Should equity allow, you can improve your property and set it up for a more profitable resale down the road. Alternatively, you can pay college tuition or consolidate personal debt. When your revenue, assets, credit standing, and collateral all make a good case for your worthiness, the time is optimal to seize the day. Those who do will be glad they did.
A common truism is that the only constants in life are death and taxes. Actually, almost everything that appears longstanding and dependable can give way. Recessions hit hard; medical crises are sometimes only partially covered by insurance, and home values can decline unexpectedly when market bubbles pop or when neighborhood character changes.
While no one should live life-based on doomsday scenarios, they should nevertheless consider utilizing good times to their maximum financial benefit. Being optimistic about the future should not preclude being sober-minded in the present. Low rates, advantageous lender rules, and a solid financial position make waiting for less prudent and immediate action more compelling.
Homeowners who are paying down an adjustable rate mortgage (ARM) often do well to refinance to a fixed-rate product. While the ARM is a useful loan, particularly for first-time home buyers, there are equally good reasons to convert to fixed payments. While rates are low, borrowers need not worry about future fluctuations, especially increases. Although ARMs have caps on how high rates can go, the higher end of the range is doubtless more expensive than the initial rate. As demonstrated above, many factors can drive interest closer to the caps.
Are you curious about mortgages, or are you ready to apply for one to buy a second home? If so, Sammamish Mortgage can help. We are a local mortgage company from Bellevue, Washington, serving the entire state, as well as Oregon, Idaho, and Colorado. We offer many mortgage programs to buyers all over the Pacific Northwest and have been doing so since 1992. Contact us today with any questions you have about mortgages.
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