'Tis a month after Christmas, and all through the town not a soul is buying, but rates are on their way down! Indeed, mortgage rates are moving lower on news of a weakening economy. The 10-year Treasury bond, which used to be the bellwether of 30-Year mortgage rate is at its lowest point since 2004. The rate for a 30-year fixed mortgage seems to be slipping daily.
When is the appropriate time to refinance? Actually, it is a simple calculation. Let's take the example of a $300,000 loan at 6.375%. The payment is presently at $1,860. At 5.625%, the payment will be $1,714, and the monthly savings is $145. The cost of refinancing this loan is about $3,200. We divide the cost by the monthly savings, and in this case, we get 22. What this means is that the cost is repaid in 22 months, which is about a 54% return on the investment (145x12)/3200. This is a good deal. I reckon that if you can pay back the costs in less than 3 years that you are wise to consider refinancing.
There is another motivator that is bubbling to the surface. The 2008 Federal Economic Stimulus package, which is wending its way through Congress, at the present, proposes a temporary rise in the FHA loan limit. It is not certain now exactly how this will shake out, but the proposal temporarily lifts the Fannie Mae conforming loan limit to 125% of the metropolitan area median price for a single family home. In Santa Fe today, this is $433,500 and could translate into a conforming loan limit of approximately $542,000. However, there are other provisions which may raise it to $625,000. Whatever it is, it should be in place by the end of February and offers holders of jumbo loans that fall within the loan range a significant reduction in rate.
There are some things to consider, though:
- You can include all of the costs of refinancing in the new loan without penalty.
- If you payoff a HELOC or 2nd mortgage that was not part of the original purchase, it may be considered a cash out refinancing, resulting in a slightly higher rate.
- The best deals today are in conforming loans.
- Look at the reality of your situation. You do not need a 30-year loan if you are going to sell or refinance within 5 years. 5/1 ARMs (rate fixed for 5 years on a 30 year loan) offer better pricing.
- Interest only loans are more expensive in rate, but the payments are lower.
- Loans with full documentation are much cheaper today; stated income loans have become problematic.
- All loans today are more difficult to get approved than they were 6 months ago. Lenders are much more suspicious and require more documentation. Be patient.
Rates seem low now, and they may go lower, but with the uncertainty in our economy today, if the savings make sense, then Santa has, indeed, delivered a Christmas present in February.
