The Boston area mortgage lending market experienced something unusual in the past sixty days. The Federal Reserve raised the interest rate back in December 2015. Since that time, mortgage interest rates have dropped to their lowest level in three years! Most economists and mortgage lenders pointed out at the time that an increase in the Fed Funds rate wouldn’t necessarily translate to an increase in mortgage rates. However, few saw the resulting lowering of mortgage rates in their crystal balls.
Boston Area Mortgage Rates: Time to Refinance?
Mortgage interest rates usually drop when volatility fueled by uncertainty in the stock market makes investors sell their higher-risk stocks in favor of buying safer bonds. When bond prices move higher as a result of the brisk buying, the yield on those bonds go down. A quick look at the stock market over the first 45-50 days of this year shows exactly what’s happened. Investments in U.S. Treasury bonds and mortgage bonds have been strong – for the time being.
In December 2015, fixed rates on 30-year conventional conforming loans were roughly 4%. Due to increasing bond trades, interest rates on this and other mortgage products have dropped as much as .5%. To better put that in perspective, a half-point interest rate reduction can significantly reduce monthly payments. It results in an $85 savings per month on a $300,000 Boston area mortgage, $170 per month on a $600,000 mortgage and a $900,000 mortgage payment will be reduced by $253.
As if these savings weren’t reason enough to consider refinancing, according to some analysts it’s possible that rates could fall even lower over the next several months. But there’s more to refinances than just interest rates. Other factors come into play like income and assets, property eligibility, and home equity. In the past, specifically in other post-housing crisis interest rate drops, some homeowners were unable to refinance. Many people were underwater with their mortgages – they owed more than their home was worth. In addition, other problems contributed to their inability to refinance such as income instability, slow credit and changing lending policies and guidelines.
In today’s Boston area mortgage environment, refinances are more prevalent. Home prices have either leveled off or are still increasing, unemployment has dropped and income growth is on the upswing. In addition, cheap oil prices have helped keep inflation low, and mortgage lending guidelines are more flexible than during any previous post-crisis rate reduction. All these reasons and more make it easier, more conducive and a smarter move to refinance than perhaps ever before.
Let’s take a look at the reasons home owners refinance. First and foremost, of course, is to lower their interest rate, which lowers the monthly mortgage payment. However, there are other reasons to take into consideration when you’re contemplating refinancing.
Reduction of loan payoff term.
Borrowers looking to reduce the length of time they have to pay on their mortgage should consider refinancing a 30-year loan to a 15-year loan. Naturally, a shorter term loan carries with it higher payments – though the interest rate is usually lower. With today’s even lower interest rates, it may be surprising at how affordable a 15-year loan term can be.
As your home equity builds over time and as a result of higher home values, the nest egg your home represents can be substantial. A “cash out” refinance can give you access to your home’s equity to do with it as you wish. Many homeowners refinance their Boston area mortgages to make investments, purchase additional real estate, pay for college expenses for their children, or make home improvements.
For qualified borrowers, non-housing related debt can be included into a home refinance. These debts could include auto loans, credit card debt, student loans and other consumer debt. Debt consolidation can help improve a credit score by showing that certain accounts have been paid in full. In addition, by rolling existing debt into a mortgage the borrower is able to deduct that additional interest, converting non-tax-deductible debt into tax-deductible debt.
Elimination of mortgage insurance or cancellation of a second mortgage.
Homeowners who purchased homes with a mortgage with less than a 20% down payment were probably required to carry mortgage insurance. Mortgage insurance protects the lender from the borrower defaulting on the mortgage loan payments. If the home’s value has appreciated enough to where the loan-to-value ratio (LTV) is 80% or less, a borrower can refinance the mortgage and eliminate the mortgage insurance requirement. For borrowers who have a second mortgage on their homes, refinancing is an excellent way to combine both the first and second mortgages into a new first mortgage.
Now that you know the reasons homeowners typically refinance, let’s examine the steps in the actual process itself.
Decide on a Boston area mortgage lender.
While your existing lender may be a good place to start, there are a variety of lenders offering similar interest rates and refinancing options. Choose the one that best fits your needs. Most rate quotes are based on a refinance being closed within 30-45 days. If you need to lock in your interest rate for a longer time period before you close, you can expect the rate to be slightly higher. Therefore, it’s important to get your lender the needed documentation and paperwork as soon as possible.
Assemble the documentation.
When it comes to documentation, a refinance is really no different than a purchase money mortgage. Federal lending regulations require that mortgage lenders have current employment and income verification, asset and liability statements and an updated credit report.
Appraise your home.
There are two parts to the refinance equation: one is the borrower, the other is the collateral on which the mortgage is made. Of course, the borrower must qualify, but the home has to, too. Your Boston area mortgage lender will require an appraisal to determine the value of your home. They then use that appraisal amount to decide whether the loan amount you’re seeking is within their guidelines concerning the LTV ratios for refinances.
Refinancing is always an exercise in comparing the total payment savings against the costs of closing the loan. While closing costs vary according to loan size and lending market, they typically range from $2,500-$4,000. If you paid to refinance and rates dropped lower you’d risk losing money. Enter the no-cost refinance.
A no-cost refinance carries with it a rate that is slightly higher. If rates dropped, however, you wouldn’t be wasting money if you elected to refinance at the new lower rate. Discuss this option with your lender and see if it’s right for you.
Lock in your interest rate.
Work with a lender that will pre-approve you for the refinance. That way, you can be assured you’re being locked into a program and a timeline your lender can meet. Plus, once pre-approved, it’s easier to lock in a rate when they may fluctuate day to day.
Because rates change almost daily, if rates drop after you agree to your rate lock, most lenders have policies allowing you to renegotiate to the lower rate prior to closing.
We have a lot more Boston area mortgage information for you in our Boston Mortgage Info section of articles to your right just below our Boston Real Estate Categories. We also update the mortgage situation constantly on Twitter and Facebook. Check us out there as well.