Looking at the past couple Mortgage Banker Association weekly mortgage application reports, the share of refinance applications revived from its recent lackluster levels and surged to the highest level since July 2013.
But it wasn’t too long ago that homeowners were rushing to their lenders to refinance their home, taking out a huge portion of the pie of people eligible to refinance.
However, according to Jason Dickson, branch manager of the Texas Region, Churchill Mortgage, rates are low enough again and enough time has passed to give people incentive to refinances.
Dickson explained that there are thousands of homeowners who did not take advantage of the low rates back then, and now have the ability to do so.
Here are four factors that Dickson explained could determine if a borrower should refinance:
1. Home values and appraisals
Prior to 2013, homeowners who attempted to refinance experienced challenges due to home appraisals and home values coming in too low to be able to qualify for a refinance loan. Since 2008-2009, home values have increased substantially and many home owners who did not qualify for a mortgage refinance previously (due to appraisal/home values) will not have the same home value challenges in many instances.
2. Family situation
There is no “rule of thumb” when it comes to the interest rate drop justifying a refinance, mostly due to the many factors that can create a reality where a refinance can benefit a family financially. For example, when a household switches from dual- to single-income, it may be necessary to refinance to a longer term to lower the payment based on the change of income status. Not only do lower rates save money, but some families need to refinance to a lower rate, as well as a new 30-year fixed term to maximize cash flow for their household, based on budgeting for a lower household income. Also, many Americans find themselves in consumer debt due to circumstances beyond their control and a refinance that did not make good financial sense two years ago may now be very appealing, based on their household budget and low mortgage rates.
3. Mortgage term
Many homeowners who refinanced in recent years may now be able to afford refinancing from a 30-year fixed to a 15-year fixed, based on the substantial rate drop, compared to their financial picture 2-5 years back. Many home owners who have a great rate from previous years can actually refinance to an even lower rate and/or shorter term, saving tens of thousands to hundreds of thousands of dollars in mortgage interest, depending on their specific situation.
4. Updated regulations
Lending guidelines have eased somewhat over the past couple of years and the housing market has shown more signs of life than in previous years. In recent years, many newly-implemented regulations have created challenges for some home owners who might have attempted to refinance two years ago. Since that time, however, the lending institutions and mortgage industry have had sufficient time to implement and learn how to operate within the regulatory environment, which has created more accountability for lenders. Also, lending guidelines slowly continue to improve, making mortgage qualification and refinance easier to understand and more accessible compared to recent years.
After the motivation, borrowers should look at how much money will go into the refinance versus how long it will take them to break even on the money they are saving, said Wade Betz, vice president of sales with Guardian Mortgage.
The fees on a refinance come in three sections: lender fees, title company fees, and prepaid expenses, which is the basically the funding of an escrow account, Betz said.
At minimum, a property value has to go up 6% to cover the Realtor commission that they likely are going to have to pay on sale, he added.