Mortgage Refinancing Boom
The New Year brought with it a little financial relief for consumers. As of the second week in January, the average interest rate on a 30 year fixed rate mortgage was at 4.89 percent. The low rates have resulted in an increase in applications for mortgage refinancing. A survey released by the Mortgage Bankers Association shows that applications for mortgage refinancing were at a five year high. Applications increased 25.6 percent from the week prior and the level of activity has not been this high since June 2003.
There have been so many applications for mortgage refinancing that some analysts in the housing sector say that it is causing a tiny boom in real estate. It would be a larger one, they say, if new lending practices were not so tight and values were not so low. Value decreases have caused decreases in homeowner equity, and in some cases homeowners now own so little equity that they are not eligible for mortgage refinancing. In Ventura County in California, for example, it is estimated that of the properties purchased there within the last five years, about 40 percent are now worth less than their purchase prices. The higher credit scores and spotless credit records now required for mortgage refinancing mean that fewer consumers now meet the standards. Some banks are now requiring a credit score of 700 or higher to be eligible for the low rate mortgages.
Many financial analysts believe that interest rates will remain low the next few months, since the federal government agreed to purchase $500 billion of mortgage backed securities in the hopes that it would spur lower lending rates and encourage consumers to take on new mortgages. If you are interested in mortgage refinancing, now is a good time to shop around. The general rule is that if the interest rate is 1 percent lower than your current rate, then it would be wise to undergo mortgage refinancing. It is, however, more important to look at your particular situation and determine if the cost and savings over the time you intend to own the mortgage makes sense. The first step is to figure out how much you would save each month with the new interest rate by subtracting the new estimated monthly payment from the one you make now. Then add up all the costs of the mortgage refinancing. Take that total and divide by what you think you will save each month. This total (given in months) will tell you when you will make up the costs of the refinance and start seeing savings each month, also known as when you will break even. If you plan to own the house beyond when you break even, then mortgaging refinancing should be considered.
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