Mortgage refinancing a viable option for many US home owners

By Pete Southern in LiveWire Economics Blog | January 11, 2008 9:42 |

With showing average 30-year fixed mortgage rates at 5.53% in their weekly survey for today (January 10), there has never been a better time for many Americans to refinance their mortgages.  Even home owners that have purchased at the high end of rates in the last few years with rates steadily hovering between 5.75-6.5% are looking at their options to get into these record low rates.

Home owners considering refinance must compare the benefits of refinancing with the upfront costs of the new mortgage loan.  Similar to an initial mortgage, refinancing includes bank closing costs as well as appraisal fees, and other fees such as title and recording, and legal fees.

Generally, refinancing to a lower rate is a good move if the home owner can reduce monthly payments and interest to the point where the costs paid to refinance will be covered within an adequate period of time.  Refinances can vary in terms of time to break even, depending on the interest rate differential from the original rate.  Refinancing to a rate significantly lower could reach a break even point within a matter of months or one to two years.  Small differentials may take longer.

The question for home owners is, how long do they plan or expect to own the property refinanced.  If they will be in the home for the full length, refinancing to a lower rate is definitely a strong option.  If there is job instability or a reasonable likelihood of a move in the near future, refinancing may not be a good investment if the costs to refinance cannot be recovered through savings before a move.

Refinancing to the lower fixed rate mortgages is giving some struggling variable rate borrowers an opportunity to obtain more manageable monthly payments.  However, many adjustable rate borrowers use these loans because they either have shaky credit or are hoped to increase income before rates went up.  These candidates are often not able to get the best rates with their credit.  Some with reasonable credit, and improved income situations, are able to jump out of variable rates and get the lower fixed rates

While some refinancing is used simply to take advantage of lower rates, other home owners refinance for other economic advantages.  Over the life of a loan, even a quarter-point or half-point rate change could potentially save tens of thousands in interest payments.  Some home owners that also struggle with revolving debt from home equity, credit cards, or other sources, use cash out refinancing as a way to consolidate debt.

Cash out refinancing enables borrowers to refinance at the lower rate and cash out some of the equity in their home in order to pay off higher rate balances.  Some will use cash out to consolidate a second mortgage or equity line of credit into one monthly payment at the lower mortgage rate.  Others take the equity left after maximizing their loan-to-value ratio with the refinance and pay off credit card debt.  Essentially, they are trading out higher rate credit card debt, with no tax benefits, for lower rate mortgage debt with interest based tax benefits.

While refinancing may not be the practical or the possible move for some home owners, it is a great opportunity for those looking to take advantage of all time low rates for long-term financial gain, or more efficient debt.  The challenge in some markets is that low market value for a home makes it challenging to get good equity or increased mortgage financing.

Rates change day to day, and many home owners wonder when the right time to refinance is.  Even with rates currently sitting at all time lows, talk of more Fed rate cuts and a continued housing slump could drive them lower.  However, waiting could be a gamble as unexpected developments could send rates back up quickly.

Market Recap

Stocks rebounded strongly on Wednesday, following Tuesday’s sharp sell off.  The Dow closed up 146 points, a gain of 1.16%.  The market moved back and forth following a strong open, late morning fall and afternoon climb.  There was little moving news on the day, but Alcoa announced a 76% profit increase during the fourth quarter.  Countrywide Financial announced a rise in loan delinquencies, but the news was somewhat buffered following Tuesday’s bad housing and mortgage news.  Thursday was another strong trading day with the Dow up 117 points (.92%).  The biggest news was reports that Bank of America was looking to buyout struggling Countrywide Financial.  Another report backed the notion the retailers had poor sales in December.

Neil Kokemuller
Thursday, January 10, 2008
7:54 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA.  He has a MBA from Iowa State University with a specialization in marketing.

Please note:  The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments.  Actions taken on the basis of the information shared is at the sole risk and discretion of the individual.

Pete Southern About Pete Southern
Pete Southern is an active trader, chartist and writer for market blogs. He is currently technical analysis contributor and admin at this here blog.

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