Business and Financial News

When you compare refinance rates, you’ll immediately gravitate towards the “yes” camp, with good reason. However, when you evaluate some other equally critical factors, you may begin leaning to the “no” side of the fence.

Interest Rates

From a pure interest rate perspective, there has never been a better time to refinance your home. With fixed rates in the range of five percent—or less—national and local mortgage rates have never been lower.

Shopping around, via Internet or phone, will give you excellent results. Local refinance rates are the lowest since formal records have been kept. Fannie Mae (Federal National Mortgage Corporation) and Freddie Mac (Federal Home Loan Mortgage Corporation) were born in 1971, when fixed rates were in the mid-seven percent range.

The worst rate period, from 1981 through 1982, offered us fixed rates as high as 18.45 percent, rendering home ownership and refinances almost non-existent.

Even during the real estate “boom” of 2001 through 2006, fixed rates never went below 5.45 percent, but stayed consistently in the middle six percent range. However, as of August 2010, the best borrowers could secure a 30-year fixed rate mortgage at around 4.43 percent.

Choosing a home equity loan instead of a refinance still offers borrowers rates in the five to six percent range. When you compare refinance rates, however, you will probably favor the longer term and lower interest 30-year mortgage first.

You must also realize that these very low mortgage rates will not remain at this level for infinity. This further addresses the timing issue. Refinance rates may never be lower in the future. Consequently, from an interest rate viewpoint, there has never been a better time for a mortgage refinance.

Refinance Loans Availability

Before the existence of Fannie Mae and Freddie Mac, there are numerous stories—humorous now, but not then—about banks and credit unions telling prospective borrowers, “Our current fixed rate is seven percent, but we have no mortgage money now.” Prior to the creation of the secondary market, mortgage loans were all held by lenders in there portfolio.

At that time, borrowers could typically only find purchase or refinance loans with a maximum maturity of 20 years. Even that period generated high level interest rate risk for the mortgage lender with fixed rate loans.

From a mortgage loans availability perspective, there never has been a better time to refinance when combined with a refinance rates comparison. With mortgage demand low, most lenders have many dollars to loan. Ladies and gentlemen, we have another “yes” answer.

Property Appraisals

Are you ready for the counter point factors? Since the real estate “bubble” burst in 2007, many homes have lost up to 25 to 35 percent in fair market value (FMV)!

In some parts of the U.S., a home purchased for a mere $125,000 in 1999, may have enjoyed an FMV of $250,000—or more—by 2005. With fixed rates in the five to six percent range, no income verification mortgage loans, no money down loans, and low start rate adjustable rate mortgages (ARMs), many homeowners refinanced during this period, generating thousands of low cost dollars for themselves.

However, now when you compare refinance rates and generate excitement, your worst fears may be realized. Your home, formerly worth $260,000, upon which you did a mortgage refinance, increasing your outstanding balance to $220,000, now has an FMV of $210,000.

Unless you can find refinance loans that permit a loan-to-value (LTV) of 105 percent, you will be unable to refinance at any mortgage rates. The large inventory of foreclosed homes, being offered at “fire sale” prices, further creates FMV declines for even the most desirable houses in the best neighborhoods.

Tight Underwriting for Mortgage Loans

Further complicating refinance issues are the new, more difficult underwriting—processing and approval—standards that all mortgage lenders follow. The real estate crash and recession forced many mortgage lenders—even the largest national players—out of business.

This accompanied the demise of many creative mortgage loans. For example, just try to find a no income verification mortgage. Don’t bother. You’re wasting your time.

To complete this perfect storm, mortgage lenders also tightened credit score standards. While a credit score around 620 formerly qualified most borrowers for the best refinance rates, most lenders now require a minimum 700 score for homeowners to be approved at the lowest mortgage rates.

Final Thoughts

As you can see, whether this is the best time ever for a mortgage refinance is directly dependent on your mortgage, financial, credit, and home value situation. If you own a home purchased prior to 2001 and did not receive one or more refinance loans since your original closing date, this is the best time to refinance.

Conversely, if you purchased your home at the height of the real estate “bubble” or refinanced to the maximum during the hot market, you might face a challenge that prevents you from taking advantage of the excellent mortgage rates now available.