Thinking about refinancing any of your long-term debt? You might want to do it sooner than later. Mortgage rates have hit levels unseen in more than a year and are near historic lows, but they may not stay that way for long.
On average, 30-year fixed-rate mortgages hit this year’s bottom in mid-October, according to the Mortgage Bankers Association in Washington. Rates are the lowest the country has seen since mid-2013 and remain close to the lowest in 50 years, according to loan buyer Freddie Mac, as the Federal Home Loan Mortgage Corp. is known.
Personal loans are also still relatively cheap, averaging 10.73% on a 24-month note from a commercial bank in September. The average rate hit 9.57% in May, the lowest level in at least 40 years, according to Federal Reserve data.
However, rates on 30-year fixed mortgages are likely to steadily increase over the next two years, according to industry forecasts. The MBA estimates the average will begin rising as early as the first quarter of fiscal 2015 and end the year at 5%. It also estimates rates will climb to around 5.4% in 2016.
With the recent slide in mortgage rates and the outlook for increases, borrowers have submitted debt refinancing applications by the thousands. Applications surged in mid-October to the most since last November, the mortgage bankers’ group says. The average loan balance involved rose to $306,400, the highest level in the history of the organization’s weekly market survey.
Why debt will cost more
If you’re paying more than 5% interest on any long-term debt, now is a good time to look into refinancing. Lowering your interest rate can save you thousands in interest payments on a mortgage during the course of the loan. If you’re not a homeowner but have been carrying high-rate credit card balances, a personal loan can also cut your interest expenses. If you have a late-model car that you’re still paying for, a new loan secured by it could also reduce how much you’ll pay for the credit.
Borrowing costs are expected to spiral higher partly because the Federal Reserve decided to halt an asset-purchasing program that’s helped lower pressure on long-term rates. The effort began in response to the 2008 recession. However, the Fed hasn’t changed its stance on holding short-term rates near zero for a “considerable time.” So while it will take time for borrowing costs to increase significantly, today’s rates – and great deals on refinancing – may not last much longer.
Easier lending standards
In the years before the subprime mortgage market meltdown in 2007, which prompted the financial crisis that led the Fed to cut rates to near zero, lending standards were so lax that it seemed like you needed only a pulse to qualify for a home loan. Requirements are much tougher now. But if you have good credit you may find a sympathetic ear at a credit union or community bank.
Fannie Mae, as the Federal National Mortgage Association is known, and Freddie Mac, along with their regulator, the Federal Housing Finance Agency, are working on an agreement to loosen loan criteria on mortgages. Because of their roles in the secondary market for mortgages, the two government-sponsored enterprises effectively set rules that lenders follow so they can sell this type of debt to investors.
When the housing bubble burst, banks were stuck repurchasing mortgages and thus are more hesitant to lend to those with weak credit out of default fears. New guidelines are expected to let lenders better manage risk by taking into consideration “compensating factors.” Essentially, they encourage financial institutions to lend more freely and responsibly to those with lower credit scores and to reduce down payment requirements on new purchases.
Right now, homeowners who are most likely to get a green light to lock in low rates are those with:
- regular income and employment
- a good credit score
- high equity in their homes
- few other debts, such as student or big car loans
Above all, if you’re considering refinancing, you need to do it for the right reason – saving money. Interest isn’t the only factor to consider, but you’re most likely to benefit if you can shave at least 1 percentage point off your current rate. Usually, you’ll save more if you refinance early in your loan’s term. You also need to figure out your financial goals, how long it’ll take to recoup related costs, and how long you’ll likely keep your property. Then crunch the numbers to see if it makes economic sense.
If you determine you can save a bundle, then you shouldn’t sit it out – lock in the best deal you can while interest rates remain low.
Image of time as the key via Shutterstock.
The post Low Mortgage Rates Mean Now Is a Good Time to Refinance appeared first on NerdWallet Credit Card Blog.
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