Refinancing volume has been perking up recently, and it's no secret why. Many homeowners would be wise to take a cue from the recent activity.
Current refinance rates have taken a significant step back from the high point reached this past summer, and meanwhile home prices in most parts of the country continue to recover. For many homeowners, this combination creates a powerful opportunity to refinance a mortgage.
Mortgage Rates Ease
The Mortgage Banker's Association recently reported that refinance application activity jumped by nine percent during the week ending October 25. This brought refinancing as a percentage of total application activity to its highest level since June.
Why are so many people suddenly eager to refinance a mortgage? One reason is that mortgage rates have radically reversed course. After rising to as high as 4.58 percent this August, 30-year fixed mortgage rates have since fallen by nearly half a percent to 4.10 percent, according to mortgage finance company Freddie Mac.
Current mortgage rates are certainly very attractive, but they were even lower in the early part of this year. So why are so many people just getting around to refinancing now? The reason may have to do with the slump - and subsequent recovery - in housing prices.
Home Prices Push Loans Above Water
According to the S&P/Case-Shiller Home Price Indices, average home prices across a sampling of 20 major metropolitan areas declined by 35 percent from their peak in July of 2006 to their low point in March of 2012. Home prices have since recovered somewhat, and are now about 20 percent below their peak valuations.
This partial recovery - which is even stronger in some markets - coupled with people steadily paying down principal on their mortgages means that more and more loans are emerging from under water. "Under water" is a term used when someone owes more on their mortgage than the house is worth, and having a loan underwater can severely restrict refinancing opportunities. Mortgage data firm CoreLogic estimates that some 2.5 million mortgages emerged from under water in the second quarter of 2013.
Having so many homeowners return to positive equity opens up a vast potential for new refinancing opportunities, and the recent decline in mortgage rates just makes those opportunities all the more attractive.
What Steps Should You Take?
If an under water mortgage precluded you from refinancing over the past few years, it may be time to take a fresh look. Here are the steps you should take:
- Use a mortgage calculator to see if you could benefit from current refinance rates. Ultimately, the payoff from refinancing comes down to the difference between your original mortgage rate and a potential refinance rate. A mortgage calculator can help you figure out whether you could come out ahead after accounting for any fees and expenses associated with refinancing. Be sure to explore all possibilities for getting a lower refinance rate, such as shortening the term of your mortgage or making a bigger down payment.
- Check recent transactions on similar properties in your area to estimate your home's current value. Be realistic in choosing similar properties and accounting for any differences in location, condition, size, and amenities. Once you think you have a reasonable estimate of your home's value, compare this to the mortgage principal you have remaining to see if your loan is above water.
- Get quotes to find refinance rates for your credit qualifications. Published averages can give you a rough idea of where rates are, but remember that rates vary according to the qualifications of the borrower. Get quotes based on your credit history and financial status, and be sure to get competing quotes to make sure you are getting a decent deal.
This past summer, it looked like the era of super-low mortgage rates was coming to an end. Now, even though the weather may be cooling off, it seems refinancing opportunities are starting to heat back up again.