Interest rates persist at historical lows because of the slow economy recovery. As the recovery begins to take legs, consumers should expect interest rates to rise and rise quickly. Many investors worry about hyperinflation because of the low interest rates and significant amount of government spending that has happened over the last year. As the economy recovers, expect the Federal Reserve to raise interest rates quickly and expect mortgage rates to follow suit very quickly.
Refinance Today
Consumers face the challenge of higher lending standards when they attempt to secure new mortgages today. This challenge manifests itself two ways. First, many consumers purchased their homes with a very small down payment. In order to refinance their home, many consumers will have to bring additional funds to the table because many conforming loans will require at least 5% equity and many jumbo loans require 20% equity.
Second, consumers face the challenge of a declining market value. Even consumers that put down the appropriate down payment may be forced to bring additional funds to the closing table if the value of their home has decreased since purchase. Many homeowners experienced a decline of 10%+ in areas like California and Florida. These consumers may not be able to refinance through traditional routes; however, they may be able to take advantage of the government refinance programs.
Call the Mortgage Company
Every consumer should at least call their mortgage company and inquire about getting a better rate. With rates in the 4.5% - 6.0% range, consumers of all credit ratings might be eligible to lower their monthly payments. Consumers that hoped to get money out of their home through a refinance will have a tougher time than usual. With the tougher lending standards, it will be far more challenging to get a home appraised at a high market value and even harder to get a bank to lend against an abnormally high value.
For those consumers that have 40-50% equity in their home, it could be better today to refinance the first mortgage than to take out a home equity loan. While the home equity loan will be cheaper to originate, the interest rate will be significantly higher. A refinance might even help lower the monthly payment.
With rates at historical lows for the near future, it could be borrowers’ last chance to lock in low rates. Consumers with adjustable rate mortgages should consider switching to fixed and borrowers with high or even modest rates should try to lock in a lower monthly payment.
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