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Home Refinancing: Lower Rates, Stricter Rules

How to Leverage Today’s Favorable Interest Rates

Most experts agree that today’s historically low mortgage interest rates will persist through the end of 2013, so this seems to be the year to refinance your mortgage. However, you’ll have to have exemplary credit and equity to secure a worthwhile rate and save money.

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Thinking about refinancing your mortgage? You aren’t alone.

Today’s historically low mortgage interest rates have homeowners seeing dollar signs. The average rate on a 15-year fixed-rate mortgage was 2.98 percent at press time, which was up from an all-time low of 2.69 percent in mid-May 2013, according to Freddie Mac. Meanwhile, the average interest rate on a 30-year fixed-rate mortgage stood at 3.81 percent at press time, which is up from an all-time low of 3.31 percent in November 2012.

Homeowners who pay 6 percent interest on a $200,000 30-year fixed-rate mortgage would pay about $1,199 in interest and principal every month to their mortgage lenders. (Property tax and any mortgage insurance completes your monthly home payment.) Obviously, those who refinance and lower the interest rate will see their payments drop. Of course, how much of a drop that you’ll see depends on how much of the original loan that you paid off. For instance, homeowners who have paid off $20,000 on a $200,000 mortgage can refinance to a 30-year fixed-rate mortgage of $180,000 at 3.81 percent interest and pay $840 per month. That’s a savings of $359 per month, or $4,308 per year.

However, you shouldn’t expect the refinancing party to continue indefinitely. Six financial analysts with whom we spoke predict that mortgage interest rates will start to rise by early 2014. A few even predict that rates will start to rise as early as the end of 2013. In other words, if you want to refinance at a low rate, you probably should act now.

Unfortunately, today’s homeowners face a variety of challenges when it comes to refinancing. Mortgage lenders reserve their lowest interest rates for homeowners who have sterling credit, and today’s credit-score requirements are stricter than ever before. Also, some homeowners lack the equity in their home that lenders require for a refinance. Some even are underwater, which means that they owe more on their loan than what their home is worth. These owners still can refinance, but they typically will have to rely on a federal-government program to do so, and qualifying for this program—or convincing lenders to work with them—can be challenging.

Even homeowners who have strong credit and enough equity in their home might find that refinancing doesn’t make sense. The monthly savings that a refinance generates might be eaten up by the high closing costs that lenders charge. You’ll have to do some homework to figure out whether refinancing your mortgage really is worth it.

ACT NOW. It’s clear to us that the window to get the best refinance rates is closing. Interest rates are near historic lows, because Federal Reserve has engaged in three rounds of quantitative easing, in which The Fed bought $2.3 trillion worth of mortgage-backed securities between 2008 and 2012 to stoke the economy. The federal funds rate, which is the rate at which banks lend money to each other, is near zero, which also pushes down mortgage rates.

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What will happen soon is that The Fed will stop buying mortgage-backed securities, because it can’t afford to buy them indefinitely, according to the financial experts with whom we spoke. The Fed then will raise the federal funds rate, and interest rates will rise.

However, three refinances have originated for every single purchase mortgage, so lenders are taking longer to close a refinance. The time that it takes varies by lender, but Accenture Credit Services reported that in summer 2012 it took lending companies an average of 70 days to close a refinance. Typically, lenders can close a refinance in 30 days.

Because lenders are so swamped with refinance business, they can be choosier about their customers. That’s why borrowers today must have excellent credit to qualify for the lowest refinance rates. As of May 2013, myFICO said consumers who had a top FICO credit score of 760–850 could expect to get an average interest rate of 3.530 percent when they take out a 30-year fixed-rate mortgage of $300,000. Consumers who had a credit score of 620–639 could expect an interest rate of 5.119 percent on the same loan.

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