End of Sub 5% Refi?

Over the past few months, mortgage interest rates on 30 year fixed mortgages for borrowers with good credit have held under 5%. Refinancing is always the best way to lower your mortgage payment. Compared to a loan modification, a re fi doesn’t lower your credit score because you are fulfilling all of your contractual obligations, albeit in an accelerated time frame.

This past week, a survey by mortgage giant Freddie Mac’s showed that the average interest on a 30 year fixed rate mortgage had inched up to 4.94%. Qualifying borrowers paid an average of .7% in upfront discount points and lender’s fees. Most experts predict that current rates will stay relatively stable for at least a month.

Across the board, expect interest rates to then head up pushed by the expanding budget deficit, and inflation pressures caused by a rebounding economy. One good sign of economic progress was the increase in new housing starts of 8.9% between October and November.

Mid month after its two day meeting, the Federal Reserve Bank hinted that in 2010 it would start to raise rates which have been “exceptionally low” for an “extended period.” It will also stop buying mortgage backed securities next year, as early as the end of March, an action that will directly raise mortgage interest.

According to the predictions of the Mortgage Bankers Association, rates will float up a full point this coming year. That single percentage point is critical: many mortgage brokers considered it to be the minimum spread between current rate and new rate to make refinancing viable.

Remember that you will only get the best refinancing rates if you have managed to preserve your good credit. A criminal attorney I know hit a cash flow problem in the economic downturn that he solved by skimming tens of thousands of dollars from his elderly mother’s retirement accounts. On his $450,000 home, he currently owes $334,000 on two mortgages with monthly payments of $3,042 a month. Because he was recently caught with his hand in the till, his income has dropped significantly. A refinance of these two mortgages into a new 30 year fixed rate mortgage at 4.94% would lower his monthly payments significantly to $1781.  If he managed to extend his refinancing to pay off his credit cards, his overall monthly debt service would drop significantly. Still, he might not be able to get refinancing with a credit score lowered by a high debt to income ratio.

In addition to the expected consequences for his pefidy, this debtor is now facing the loss of his home. To avoid the prospect of his much deserved foreclosure, he has one major option left. Luckily, both of his mortgages are backed by Fannie Mae and his outstanding home loans fall below the conforming loan limit of $417,000 for his locale. This attorney could well qualify for a loan modification under President Obama’s Homeowner Affordability and Stability Plan although when it comes to the declaration of why a financial hardship now exists, I suggest that he not admit that he had to cut short his thievery.

If you as an honest borrower can qualify for home loan refinancing, this is the time to get the process going. Although nobody can prognosticate with absolute certainty, signs are that mortgage rates will climb in the New Year.

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