Interest Rates Hover at Record Lows

Concerns about the strength of the economy have recently taken Treasury yields to new lows. This, in turn, is causing fixed-rate mortgages to remain low.

Homeowners are taking advantage of the low interest rates. The refinance index recently reached a three-year high. Also, the Federal Housing Administration (FHA) projects to receive 630,000 refinance applications for fiscal year 2012, a 23% increase from the previous 12 months.

The vast majority of refinancing is going into fixed-rate mortgages. The adjustable-rate share of mortgage activity recently fell to 4.1% of all mortgage applications.

At the same time, home prices are increasing. Zillow reported a second-quarter increase nationwide for the first time since 2007. Standard & Poor’s/Case-Shiller housing price index is also reporting monthly price increases.

When thinking about refinancing, there are some important things to consider. For instance, if refinancing to a lower rate will save $125 a month, you, or your client, should then factor in the tax rate. If the Federal tax rate is in the 25% tax bracket, the actual savings will be $94 a month.*

Another consideration is how long it will take to recover the refinancing costs. If the costs are $4,000, it will take 43 months ($4,000 divided by $94) to recoup those costs. Then, refinancing is a good option even for those who might move in five years. If, however, the refinancing costs are $6,000, it will take 64 months ($6,000 divided by $94) to recover the costs, which, if planning to move in five years, would not be a good option.

* For example, a typical FHA loan of $300,000 has 360 monthly payments of $1,432.25; 4.000% interest rate, 4.117% APR. The monthly payment does not include taxes and insurance premiums.

from Prospect Mortgage Industry Insider

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