As the 30 year Treasury bond stays in the 5%+ area, many consider refinancing their home loan. You may have noticed during the past months that the bond market has become the safe haven for many individuals and institutional investors. Equity markets throughout Asia have taken a beating, although as of this writing there has been a slight recovery. The United States markets followed the downward trend after the drop in Japan, Hong Kong and smaller Asian markets.
Many people fled the stock market and decided the safer haven to be bonds. Interest rates rise as the price of bonds goes down and conversely, interest rates decrease as bond prices increase. During the past four weeks, we have seen a steady increase in bond prices and thus a drop in interest rates. With this drop in overall rates, mortgage interest rates have also declined.
If you haven't shopped for a home loan in the last two or three years, you may be surprised by not only the interest rate drop but also by the many program and product changes that have taken place. Lenders have become much more aggressive as to loan programs. Competition is constantly driving the market to develop products that increase the ability of people to buy homes.
Products that would have been unheard of four or five years ago now are commonplace. Lenders who traditionally were considered "A paper" lenders have now opened divisions catering to "B, C and D" paper. With these market changes, the home buyer and also one who is refinancing will find an array of programs that can conceivably drop the monthly payment, increase equity faster and if you purchased with 5, 10 or 15% down eliminate the monthly payment for private mortgage insurance.
Much has been written about the most opportune time to refinance a home loan. Many investment markets cringe at the thought that higher interest mortgages will be paid off, since this obviously drops their return on investment. However, if you are a home owner carrying a mortgage on your property, you should look at your monthly outlay and you must make the decision whether refinancing is appropriate.
If you purchased your home with less than 20% down, you may be paying a mortgage insurance premium. Monthly mortgage insurance premiums are determined by the amount of downpayment brought to the table when you purchased. You can save money if you decide to refinance and save 1% to 1.25% on your interest rate. Even if the value of your home has remained stable or only increased slightly, you can eliminate the mortgage insurance premium. By using a "piggyback" second trust deed equity line of credit or equity loan for the difference between 80% and the amount needed to pay off your current first trust deed you can eliminate your monthly outlay for mortgage insurance. The payment on a $144,000 loan at 8.5% interest and mortgage insurance will be approximately $1152.00 per month. If you refinance the same loan amount at 7.25% with a piggyback second TD your payment will be approximately $1033.00 per month. The second is paid at the rate of 1% of the unpaid balance monthly.
This scenario accomplishes the elimination of mortgage insurance, gives you deductible interest on the second TD and by applying the difference in payments between the old loan and the new loan you can pay off the 2TD faster, thus building equity faster. Since the interest on the new first Trust Deed is lower you are also building total equity. The keys to any refinance are the numbers you put on paper. Be certain those numbers work for you as to the time you plan to be in the home, the costs of the refinance and the rates quoted for any loan you are considering.
Common underwriting criterion was that debt to income ratios must be 28% for housing and 36% for combined housing and ongoing long term debt. This also has changed. Today, individuals can qualify for a home loan (particularly for refinance) having good credit and stable income with debt ratios far higher than in the past. If you think that you are overextended regarding your debt, this may be a good time to review your situation. Even If you think rates are heading lower, speak to a lender, get approved for the refinance with a rate float giving you the ability to lock a rate that best fits your pocketbook. It is always easier to work the system rationally than to get caught in the system emotionally. Do the homework and you can reap the benefits of both lower rates and market changes.
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