You've probably seen a commercial for V8 where someone gets 'bonked' in the head for skipping their veggies. Well, with rates this low, the same could be true for many people with home loans.
For six weeks running, according to Freddie Mac, interest rates continue to nudge lower, bringing new all-time lows. Compared to the average 30 year fixed rate in August 2008, rates have dropped nearly 2.0%. Better stated, the savings on a $200,000 loan equates to nearly $4,000 pretax for someone in a 25% tax bracket.
In times where employment pay increases are harder to come by, opportunities to save money each month are equally as important. In many cases, saving money today is even more important.
Recent reports from companies like Kellogg and Colgate indicate that consumers are looking to save in many ways, including buying less expensive private label products. Just as was indicated in last month's issue of YOU Magazine, while what you make is important today, what you keep counts even more.
Cash In, Cash Out, Roll In and Roll Over
Saving money these days on your mortgage can and is being done in multiple ways and in some cases, not too typical from times in the past.
One recent surge in those refinancing their mortgage has been to bring money to the table, also known as "cash in" or paying down the balance of the mortgage at closing. Freddie Mac states that 22% of refinancing borrowers chose to pay down the mortgage in the second quarter, up from 19% in the first quarter.
While more popular during the real estate boom, pulling cash out from the equity in your home can make a lot of sense for those with debt carrying higher rates of interest, particularly non-secured and non-tax-deductible debt like credit cards.
Many people took out, or were offered with their mortgage, a home equity line of credit. While many of these loans may be adjusting at rates below 5% right now, when interest rates resume their rise, the interest rate and minimum payments on these loans will be going higher. Wise consumers will be evaluating what their risk is for payment increases and act accordingly.
Roll In and Roll Over
Many consumers when refinancing "roll in" their closing costs when obtaining a new loan. As an example, say someone had a $200,000 loan and the closing costs would be $5,000. As opposed to paying the $5,000 at the closing table for the new loan, the borrower would simply obtain a new mortgage for $205,000.
As interest rates have dropped and some property values may not have increased, the ability for some people to add their costs to the loan balance has been limited by loan-to-value ratios.
That has not prevented many people from refinancing though. Check with your lender to see if they can do a No Closing Cost mortgage. A No Closing Cost loan will carry an interest rate that will be higher than a typical loan but you will be able to lower your payment without increasing your loan amount.
You Magazine spoke with Derek Egeberg, a mortgage professional who has had many clients choose this path recently. Egeberg states that many people "thought they were not going to be able to take advantage of the lower rates but have been able to lower their payment by utilizing loans guaranteed by the FHA and VA." He went on to state, "until someone picks up the phone, you just don't know what you can do and more important, how much you can save."
My Value Droppedâ€¦
Many people have thought that if the value of their home had declined, they would not be able to refinance without incurring PMI, even if they currently do not have it.
Loan programs that were released by the Obama Administration through the Home Affordable Refinance Program allow many loans that are owned by Fannie Mae and Freddie Mac to be refinanced without PMI, even when the loan amount exceeds 80% of the property value on the new loan.
Some loans can even be refinanced without the need for an appraisal through what is known as a "Property Inspection Waiver." Mortgage professional Ed Conarchy has had many clients save thousands of dollars a year through the special programs.
Conarchy says, "It's one of the best mortgage programs to come from the Administration and Washington. Until now, you would have never have been able to refinance a loan without PMI when the loan exceeded 80% of the value." He goes on to state that the program allows for most loans to go up to 105% of the appraised value.
Recent estimates indicated that as many as 10-15 million homeowners could benefit from refinancing their mortgage at present interest rate levels. Many people may not be aware of the opportunities that exist for them, potentially saving thousands of dollars a year in payments or tens of thousands of dollars in interest paid over the term of their loan.