According to Freddie Mac, 60% of total loan originations were refinances in 2013. Freddie Mac projects that number to drop to 38% in 2014.
Less people are refinancing their mortgage partly because rates are higher. Since dipping to 3.35% in May 2013, Freddie Mac’s national average of the 30-year fixed has reached 4.37%.
The Federal Reserve had helped rates drop to record lows by enacting a bond-purchase program known as quantitative easing (QE). Over the past year, mortgage rates have risen as the Fed has reduced QE and U.S. economic conditions have slowly improved.
Refinances will also drop in 2014 simply because many people already took the opportunity to refinance when rates were at even lower levels.
Many people refinance their loan in order to reduce their monthly payment or save money off of interest payments. Fredde Mac estimates that owners who refinanced in 2013 will save $21 billion in interest over the first 12 months of their loan.
So has the window for refinance closed? Not at all. There are still many owners who have rates over 5.0% and 6.0% that could benefit from a 30-year fixed rate between 4.0% and 4.5%.
There are owners who might have been turned away in the past due to underwater loans or credit issues. After the real estate bubble popped, homes lost a great deal of value – as much as 50% in some areas of San Luis Obispo County. This meant that many borrowers actually ended up owing more than their home was worth (for example: taking out a loan for $300,000 and the home’s value drops to $250,000).
SLO County home values have risen by up to 20% and 25% over the past 24 months. Owners who were previously underwater and locked into a higher rate might find themselves dry and easily able to qualify for refinance. For those who are still underwater, the federal government supports a program called HARP (home affordable refinance program) that reduces loan-to-value (LTV) qualifications for responsible borrowers.
Refinance doesn’t exist simply to lower monthly payments. Sometimes it can be beneficial to increase monthly payments, or to take on a slightly higher rate in order to take cash out for a home improvement project.
Below are a few reasons why owners might consider refinance:
- Eliminate costly mortgage insurance.
- Take cash-out for home improvement projects, home maintenance, or debt consolidation.
- Reducing interest paid over the life of the loan.
Central Coast Lending owner Jason Grote gives an example for #3 in an article over on our website (LINK: www.CentralCoastLending.com). In his example, he compares a 30-year fixed payment (at 2,477.233 per month) to a 15-year fixed payment (at $2,810.68 per month).
If the borrowers can afford the $322.86 monthly increase in payment to reduce the loan duration by 15 years, they can save over $138,000 in interest paid over the life of the loan. That’s one hundred and thirty eight THOUSAND dollars.
Give us a call at 805.543.LOAN for an honest evaluation about your finances and find out what mortgage finance program is best for you and your family. You might be surprised to learn the possibilities.