Article Library
Refinance in the Current Economy
Mortgage interest rates have dropped to historically low levels recently. In fact, it is rumored that the Department of Treasury may drop the rates to under 5 percent for consumers purchasing homes. There is no talk about offering those same rates to current homeowners wishing to refinance, but rates for refinance should not trail far behind. Some economists hope that lower rates and the recent drop in prices will encourage prospective buyers to purchase now, thus breathing some much needed life back into the real estate sector. Contrarily, others believe low rates will do little to jump start the economy. Many potential home buyers are hesitant to purchase at a time when the market may not be at a low point. Marry that with increasing job loss and uneasiness about the current economy, and many buyers may not jump in spite of low rates.
Most of the news reports rally around the idea of getting potential buyers to start purchasing from the surplus of existing home inventory. But there is little discussion about current homeowners. There are plenty of homeowners that pay their mortgages and have equity in their homes. Those homeowners could benefit from lower interest rates, as many will want to stay in their homes and refinance. A refinance does not add to the already flooded inventory of unsold homes. Most people refinance to lower their monthly payments. If those homeowners have more money in their pockets, they are more likely to make upgrades and spend money on other items they may not have purchased with higher mortgage payments. Any government effort to spur the real estate sector should incorporate low refinance rates. A stimulus plan that only focuses on home buyers misses a chance to encourage current homeowners to help kick start the sluggish real estate sector. Homeowners approved for a refinance usually have excellent payment histories, good credit scores and are an asset to the economy.
A good number of consumers looking to refinance are not willing to risk that the rates increase. A report from the Mortgage Bankers Association indicated a 200 percent increase for refinance applications the last week of November. Many of those applications, however, are being denied. The problem for many homeowners looking to refinance is the decline in home values and the tightening of lending standards. If a consumer purchased a home at the height of the boom and then saw his house value decline, he may no longer have enough equity to be approved for the refinance. A homeowner that purchased before the housing boom and has substantial equity in his home, however, would be wise to grab the current low rates and hop on the refinance train. This may be a once in a lifetime opportunity.