By Charles L. Westmoreland | Southeast Living
Editor’s note: Interest rates fluctuate daily and therefore the rates used in this story are approximations.
When is the right time to refinance your home? This is perhaps the most common question asked of mortgage lenders. Though individual situations vary from one homeowner to the next, the answer to this question is simple considering we live in a time where mortgage rates have dropped to all-time lows. In short, there’s no better time than the present.
“We should have a neon sign that says ‘Today,’” said Bob Mastrandrea, Vice President of Mortgage Lending for Alaska Pacific Bank. “Right now is the right time. You can’t sit around and wait for something to happen or nudge you to say, ‘OK, it’s time to refinance.’”
With more than 30 years experience as a mortgage lender, Mastrandrea said mortgage rates are back on the rise following the housing crisis that hit many states years ago. And he doesn’t see rates decreasing drastically in the near future. The good news is that people are buying homes again. The bad news is that means rates will likely continue to rise.
“We had rates down in the 3 (percent range) months ago, and then in the 4s, and now rates are in the high 4s and low 5s,” he said. “The best thing to do is lock in the rate and close out your home.
“Rates don’t usually jump that fast, though it did happen in recent months when rates jumped from 3% to 5%. Usually it would take 12 months for that to happen.”
Know Your Situation – Mastrandrea notes that refinancing is a personalized decision, and it’s up to each homeowner to decide when it’s right for them and what they hope to achieve by refinancing. There are some common scenarios, however, that he believes can assist in determining if someone is a good candidate for refinancing.
1. Cashing Out Equity – “This is one of the most prominent platforms for refinancing,” Mastrandrea said. Cashing out is when a homeowner cashes out their home’s equity. The money gained can be used for college tuition, remodeling, a start-up business, etc. This can occur by either paying down the original loan or if the home’s value has increased (from remodeling, for example) since it was first purchased.
2. Inheritance – Individuals who inherit a home are often good candidates for refinancing, especially if the home’s value has increased or if the home’s interest rate is higher than current rates.
3. Paid Cash for Home – Some homeowners pay cash rather than finance their home. In such cases where there is no debt against the home it can be used as collateral for a loan.
4. Improved Credit Rating – If your credit score has improved since you purchased your home you can often receive a better interest rate.
5. From ARM to Fixed Rate Loan – Individuals currently with an Adjustable Rate Mortgage can stabilize their financing with a fix rate loan, which guarantees the same interest rate for the lifetime of the loan. Adjustable rates are guaranteed for a certain period of time and are then adjusted periodically.
6. Increase in Income – Have you received a promotion or pay increase? If your debt to income ratio has improved that will likely result in a more favorable rate, Mastrandrea said.
7. Private financing – Did you purchase or finance your home through the seller or the contractor who built it? Mastrandrea said in these situations a person might be paying around 7.5% interest and could see immediate savings by refinancing at current rates (around 5%). A basic rule to follow, Mastrandrea said, is to refinance if you can gain an advantage of 2%. “If your rate is currently 7%, and right now rates are around 5%, that’s an ideal situation for someone to refinance,” he said.
ARM Advantage – The most common mortgage loan is a 30-year fixed loan, Mastrandrea said, but in some situations going with an Adjustable Rate Mortgage (ARM) is the right fit. Southeast Alaska is home to hundreds of Coast Guard families, many of which are stationed here for 3-5 years. For families only planning on living in a home for a few years before moving on, Mastrandrea recommends a 5-year ARM. He offers this scenario:
“Based on a $200,000 loan, that Coast Guard person looking for a 30 year fixed loan at 5% would have approximately $1,073 in monthly payments. By offering him a 5-year ARM at 3.25%, the monthly payment would approximately be $870, an annual savings of $2,436.”
What Drives Interest Rates? – The stock market is one of the factors that determine interest rates. The other is the strength of bonds, Mastrandrea said. “If investors are selling stocks to escape the volatility and are moving funds into bonds as a safe haven, we will probably experience lower mortgage rates,” he said. “If investor demand in bonds is low, we will probably end up with higher mortgage rates.”