Record low reduced interest Rates for Refinancing

house_single_story7_original_900Homeowners who refinanced their mortgage in the fourth quarter of 2012 experienced record low reductions in their interest rates-an average of 33 percent-a savings that Freddie Mac hasn't seen in the 27 years of observance.

Refinances came close to hitting another record in fourth quarter refinances when 84 percent of refinancing homeowners lowered or retained almost the same loan principal by offering additional funds at the time of loan closing. The record high is at 85, making this just 1 percentage point lower than what was recorded a year earlier in the last quarter of 2011.

Those who refinanced their mortgage reduced their interest rate by about 1.8 percentage points, according to Frank Nothaft, VP and chief economist at Freddie Mac. Nothaft goes on to say that this translates to about $3,600 in annual savings on a $200,000 loan.

An official program of the Departments of the Treasury & Housing and Urban Development is known as the Home Affordable Refinance Program, or HARP. HARP is designed to help eligible homeowners who aren't behind on their mortgage payments but have been unable to get traditional refinancing due to a decline in home value-helping such homeowners get a new and more affordable mortgage.


HARP refinances included a higher interest rate reduction than their traditional counterparts. With an average HARP refinance, a borrower's interest rate was lowered by 2 percentage points compared to a 1.5 percentage point drop for non-HARP refinances.

HARP refinances occurred largely with older loans, with a median age of about 5-9 years as opposed to a non-HARP loan median age of 3-7 years.

Those who benefited from a HARP refinance in the fourth quarter had a median decline in home value of 29 percent while their counterpart borrowers generally experienced low or zero value depreciation. Nothaft praised HARP for enabling so many borrowers that otherwise wouldn't have had access to refinancing their mortgage to obtain low rates and reduce their interest rate and monthly payment. Nothaft added, "this increases the likelihood that these borrowers will continue to perform on their loan and remain homeowners."

When to Refinance Your Mortgage

There are lot's of reasons why homeowners opt to refi their home. The first one is fairly obvious-to get a lower mortgage rate. And with the aforementioned record low reductions in mind, it's easy to see why going for a refinancing these days is popular, especially considering that the average rate on an outstanding mortgage at the start of 2012 was 5.098 percent. But low rates are not the only motive for refinancing a home.

And for homeowners who would like to refinance but can't because of no equity due to falling home values, HARP may be a viable option. HARP has been revamped to allow homeowners to refinance regardless of how deeply underwater they are. These revisions aside, some still found quite a few obstacles to jump over, but for 2013 the situation is improving.

Another reason homeowners are refinancing is to get out of adjustable-rate mortgages and into fixed-rate loans. Sometimes it's not about getting a better rate, but about getting a stable rate.

And remember the cash-out refi craze? Millions of borrowers took advantage of cash-out refinances by refinancing for more than they owed, received cash and either spent it or invested it. Though it's not what it used to be, cash-out refinancing still exists. The president of Equity Now, Michael Moskowitz says, "we're still in the business of cashing out people-paying off credit cards, for example."

house_deck4_sm_300_01Today, people don't take cash out to buy things, but rather to pay down debt and to save money. For those who did take cash out during their refinances, the total cash out value in the fourth quarter was $8.1 billion, down from $8.2 billion in the third quarter, which according to Freddie Mac, is "low volume." Last quarter's cash-out total is well below the $84 billion craze in 2006.

Then there are those who cash out to buy other homes and property. Oftentimes when people take out money to purchase other homes, it's for investment properties. There are mortgage and tax questions that arise for those who elect to do this, a lot of it depending on how the refinanced home and new property will be used.

Heard of the mysterious cash-in refi? While the cash-out refi has certainly gone down in popularity since 2006, the cash-in refi, when the mortgage is for a smaller amount that the old loan, has begun cropping up.

The homeowner is now taking a check to the closing, rather than walking away with one. Put simply, whether a borrower puts cash in or takes cash out, the borrower has either increased or decreased his debt in exchange for some cash. For certain homeowners, it can make it easier to qualify for a refi and by increasing your equity it can help you qualify for a better mortgage rate.

Heard Enough?

If you've been sitting on your hands when it comes to refinancing or buying a home, you may do well to consider this year the best chance to act.

If you haven't refinanced recently it's likely you're paying a higher interest rate on your mortgage than you should be paying. You've likely heard of today's record-low mortgage rates-and while they're expected to stick around for the first few months of the year, don't expect them to keep playing forever. They will gradually increase, and you won't want to be one of the homeowners who missed out on the opportunity to grab the lowest mortgage rate in history.

And if you're getting ready to buy, now is the time to make the move. Rates are near the bottom and home prices are rising, especially in Idaho, one of the best performers in the nation right now. It's the time to take advantage of the market and own a home for less. Credit standards remain tight, so it's important to consider your credit as one of your most valuable assets.

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