Refinance Activity Rates May Be a Wake-Up Call
Following the crowd is not always the best way to handle financial matters. However, in the case of recent figures showing a rush to refinance mortgages, following the crowd may not be a bad idea. These refinance activity rates may be a wake-up call to anyone who hasn't already looked into refinancing an existing mortgage.
There are a number of things that can be accomplished by refinancing a mortgage, including switching from a variable to a fixed-rate mortgage, restructuring to a longer time frame to make payments more manageable, and securing a lower refinance rate to save money. Given recent circumstances, it is likely that all three have played a role in the recent scramble to refinance mortgages, but the third, most universal motivation -- saving money -- is probably the leading factor.
Refinance Activity Rates Perk Up
The overwhelming trend of refinance activity since year-end shows a huge increase. The Mortgage Banker's Association index of refinance applications more than tripled in January of 2008, surging from 1620.9 to 5054.0.
Mortgage application activity overall grew in January, but refinance applications were the dominant force. As a result of the flurry of refinance activity, refinance applications grew from about half of all mortgage applications to over two-thirds.
What's Behind the Activity
This concerted movement to refinance mortgages is not a random event. Perhaps most significantly, it is also not a market fad, but rather a rational response to recent conditions. Mortgage rates have dropped by over a full percentage point since last summer, and recently approached the lower end of their historical range.
Borrowers might discover refinance rates that are significantly lower than those on their original mortgages. They could lower their monthly payments and overall borrowing costs by switching to these lower refinance rates.
Comparing Refinance Rates
While mortgage rates have dropped on average, whether or not you can get a favorable refinance rate depends on a several considerations. First you have to compare current rates with your original mortgage rate. Current 30-year mortgage rates are about 5.7%; if you were fortunate enough to get a rate nearly that low originally, you may not need to refinance your mortgage. However, if your existing mortgage rate is much higher, chances are good that you can get a refinance rate that will save you some money.
And then there's your credit rating. If your credit scores have dropped significantly since you took out your original mortgage you may not be offered a good refinance rate. Conversely, if your credit has improved you may be able to a better loan by refinancing.
Finally, the value of your home and the amount of equity you have will influence your ability to refinance. If home values have dropped in your neighborhood and you bought your home with a small down payment you might not be able to refinance. If your original mortgage has negative amortization provisions you might even owe more than the house is currently worth. In that case you probably want to keep your current loan until the market improves and then refinance. Real estate markets are cyclical and today's bust can be tomorrow's boom.
Acting Decisively
One other thing that the surge in refinance activity demonstrates: if favorable refinance rates are available it is important to act decisively. Mortgage rates can be highly changeable -- there have even been a couple years in which they have jumped by over two full percentage points. There is no guarantee of how long favorable refinance rates will last.
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