Home buyers and sellers do not have as much reason in September 2018 to get in touch with the mortgage lender these days. Mortgage interest rates are near recent highs in the 4.7% range for a 30-year, fixed rate mortgage. Refinance rates have been showing signs of rising again and home affordability is not what it once was.
Rising rates make refinancing for lower monthly payments more difficult unless you choose a Hybrid ARM that has a fixed mortgage rate for 3, 5 or 7 years.
According to the Mortgage Bankers Association, volume for mortgages is 18% lower compared to this time a year ago. Refinance activity is continuing to drop because not as many borrowers are able to benefit because rates today are higher than a year or two ago. If you got a fixed rate mortgage below 4% in 2017 or earlier, you will not be able to touch that rate or get anything lower these days if you are seeking a fixed rate refinance.
However, just because mortgage rates are on the rise does not mean that you cannot get an affordable mortgage. As fixed rate mortgage rates are continuing to rise, more Americans are looking at adjustable rate mortgages or ARMs. An adjustable rate mortgage is a home loan with a variable interest rate. The rate will be fixed for a certain period, such as 1, 3, 5 or 7 years. At that time, the interest rate will adjust either up or down depending upon the prime rate or LIBOR rate, most often. The rate for an ARM is often .5% or even .75% lower than a fixed rate loan.
An ARM loan can be a good choice for someone who wants to buy a home or refinance but does not want to have the higher fixed rate. ARMs carry lower interest rates because they are shorter term, fixed loans that are lower risk for lenders because rates and payments are lower.
While ARMs have not been as popular as fixed rate loans over time, they still can be a good choice for some borrowers. As rates have been rising in 2018, ARMs are accounting for approximately 6% of all home loans, including refinances. Experts in the industry think that ARM usage will continue to increase because the Federal Reserve is probably going to raise rates again in 2018 and possibly more in 2019.
Who Uses ARMs to Refinance?
There are certain types of home buyers who are leaning towards ARMs as rates rise. One of the most common groups in 2018 is the first time home buyer. First time buyers often have lower incomes, more debt, and less down payment. They are usually renters and do not own a property they can sell and get equity for a down payment. So, these buyers tend to be more sensitive to the size of the monthly mortgage payment and the interest rate. A lower interest rate with an ARM allows them to buy more home or to buy a house in a hot market with high real estate prices. ARMs can be especially good for buyers in metro areas where demand is very high and/or inventory is low.
Mortgage experts say in 2018 in higher priced markets such as California, there has been an uptick in ARMs this year and last year.
Is an ARM a Good Choice for You?
ARMs can save buyers substantially up front, depending upon whether you choose a 1, 3, 5 or 7 year ARM. But they are not always the best choice for every buyer. The loans give you a lower payment at first, but these savings are usually only temporary.
Because the low payment benefits are usually only for a limited time, ARMs are usually only recommended for buyers who plan to own in the short term. If you think that you are going to live in your home for only a few years, getting an ARM can make perfect sense. Perhaps you are in the military and you know you will move in three years. In that case, a 3/1 ARM can really save you. Or, you may know that you will be getting a promotion and moving in five years, so a 5/1 ARM can save you thousands in interest.
But if you are buying a home that you plan to stay in for many years, be wary of ARMs, experts warn. You could end up paying a much higher monthly payment when the ARM resets.
If you are considering an ARM, make sure you know what the cap on the rate increases is for one year, and what the cap is over the life of the loan. That way, you know exactly how much of a risk you are taking with an ARM.
Everyone wants to save money on their monthly mortgage payment. That’s the reason millions of Americans refinance their mortgage each year. If you are wondering if you should pull the trigger, here are seven signals that now may be the time to refinance:
#1 Your Rate Is Higher Than Today’s Rates
Is your mortgage interest rate higher than the rates you see advertised online? It could be time to refinance. If you closed on your home loan more than five years ago, it could be higher than rates are today. Even after the recent Federal Reserve rate hikes, rates for mortgages are still under 5% in 2018. You could have a higher rate than that if you got your mortgage at the height of the last economic boom.
Some home owners do not want to go through the hassle of refinancing because of all the paperwork. But saving even a ½ a percent on your home loan can save you tens of thousands in interest over the years.
#2 You Want to Drop Your Payment
When you refinance, you are not only getting a lower rate that can save you money each month. You are stretching your loan payments over a longer time and this reduces the payment, too. For example, if you have a $200,000 home loan and you paid on it for 10 years, you will have about $150,000 left. If you refinance that amount for 30 years, it will give you a lower payment. You will be paying more interest, however, so that is important to keep in mind.
#3 You Are Paying PMI
Most Americans put down less than 20% on their home, so they need to pay for private mortgage insurance. If you have a conventional mortgage loan, your PMI should cancel when you get to 78% LTV. However, if you have an FHA loan that was closed after June 2013, you probably have to continue to pay for mortgage insurance even after you reach 20% equity. Most FHA loan holders must pay for mortgage insurance for the life of the loan.
The only way to get out of this is to refinance the loan to a conventional mortgage when you get to 20% equity. Refinancing will cost you in terms of closing costs, but mortgage insurance is expensive. If you eliminate it, you could save $100, $200 or more per month.
#4 You Have Home Repairs You Want to Make
When you refinance your mortgage, you also have the option in some cases to pull equity out of the property to use as you like. Most states let you borrow up to 80% of the value of your home, minus what you owe. For example, if your house is worth $300,000, and you have a $200,000 loan balance, you can borrow $40,000 according to many lenders’ rules. That money could be used to fix up your home and add value to it. When you want to sell it, you could get a higher price.
If you do want to pull out cash and fix your home, make certain that you are renovating things that will add value. Most experts recommend starting with a kitchen and bathroom renovation. Putting in energy efficient windows is also a desirable upgrade. Choose from subprime, conventional and cash-out FHA refinance options.
#5 You Are About to Retire
If you are getting close to retirement and you still have a mortgage, you could benefit by refinancing into a lower rate. Many retirees have a reduced income, and this will help you to breathe easier every month.
If you have your home paid off, you might think about a reverse mortgage. This is where you get monthly payments or a lump sum payment using the equity of your home. A reverse mortgage is not due until after you die. But your heirs’ estate will be affected by doing this, so it is something to consider carefully.
#6 You Have an ARM
Adjustable rate mortgages are often a good way to save money early on. An ARM has a lower rate for the first three or five years. After that, it will adjust to market rates. This can cause a sizable payment bump. Some home owners may want to lock in a low fixed rate when their ARM is going to reset. We anticipate that ARM refinance loans will be popular in 2019.
#7 You Have a HELOC With a Variable Interest Rate
If you have a variable rate home equity line of credit, rates are on the rise in 2018. You may consider refinancing both mortgages into new fixed rate home loan.