Options Are Still Open to Refinance

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With the jump in mortgage rates last week, there are certainly millions of people who feel that they missed the boat. The question is, "Are there still refinance options that make sense?"

Not if you had a 6 percent fixed rate loan and wanted to refinance into a new one at 4.75 percent. That opportunity does not exist today, although there is still some likelihood that rates will drop, maybe not to 4.5 percent but maybe to 5 percent. At that point you have another opportunity. The important thing is to prepare so that if and when that happens you will be ready.

But there are other reasons as well. For example, there are millions of homeowners who have adjustable rate mortgages that are currently very low because the short-term rate index they are tied to is low. As we speak, the 6-month LIBOR rate that many ARM loans are tied to is a mere 1.23 percent. Add a typical margin of 2.5 and you have a current note rate 3.75 percent. Nothing wrong with that — at least for now.

But if you recall, the 6-month LIBOR index was around 5 percent for almost all of 2006 and 2007. You can research these rates and compare them with today's numbers. That means that your mortgage rate would have been 7.5 percent. So if and when LIBOR rates go to 5 percent again, as is likely, your mortgage will be at 7.5 percent.  Do I hear you gasp? Therefore, a good strategy would be for you to trade that loan in for a fixed rate loan.

The same thing applies to people who have 5-, 7- and 10-year hybrid adjustable loans that are still in the fixed rate period. Okay, so you are at 4-something percent or 5-something percent now.  What happens when when it switches to an ARM and makes its first adjustment? Maybe you will be at 7.5 percent too. 

If you don't want that to happen, you ought to do something about it now, while you can.

And then there are people who have large balances on their HELOC loans. Those loans are tied to prime rate and are likely in the 4 percent range now. That is attractive… now. But remember in mid-2006 when prime rate was 8.25 percent? If you didn't remember, take a quick refresher course by checking out the history of the prime rate.

The point is that all of these people are open to significant rate risk — risk that CAN BE avoided, but only if they take action. Action means getting off of the adjustable rate roller coaster and getting a fixed rate loan. Okay, maybe not at 4.5 percent, but anything in the 5 percent range is just great from a historical perspective.

There are still tens millions of homeowners out there who are paying more than 6 percent, so do not whine if you have to pay 5.75 percent for your loan.

Finally, 15-year fixed rate loans are still cheap, under 5 percent today. So if you are a few years into a 30-year loan in the mid-6 percent and are trying to figure out what to do, it's time to consider that alternative. You might find out that the payment actually goes down and that you can save tens of thousands of dollars in interest. There are good calculators available to help you calculate just how much you can save.

Randy Johnson – Author of How to Save Thousands of Dollars on your Home Mortgage and Savvy Borrower
articles, Randy is a mortgage broker who has financed over $1 billion
in properties. He writes about home buying and real estate finance
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  • Mortgage Loan Modefication

    Thanks for sharing this informative post.

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