In my last blog post we started discussing the various reasons that a homeowner would look into refinancing a mortgage. We touched on the conversions between adjustable rate and fixed rate mortgages, and the shortening of the mortgage’s term. In this post, we’ll touch on the remaining (common) reasons for refinancing.
Getting A Lower Interest Rate
As with the switch between adjustable rate and fixed rate mortgages, the goal is to save money via interest rates on the loan. When seeking a lower interest rate, it’s always necessary to switch between rate-types. In an environment where interest rates are low, mortgage holders (with fixed rates) may seek out refinancing to obtain another, fixed-rate mortgage with a lower rate. The general rule is to only seek out refinancing if there is an opportunity to reduce the interest rate by 1-2%, anything less will not be worth the upfront costs of the refinance.
Debt Consolidation or Accessing Equity
These are some of the most common reasons that mortgage holders will consider refinancing, but they are also the reasons that carry the most risk, from a personal finance perspective.
Some mortgage holders will look to refinancing in order to access their home equity. The justifications for this move will vary. Some will use the equity to pay off remodeling, which can increase the value of the house, or to purchase more property, which can be a great investment. Others will use the equity to to cover large personal expenses, or pay off other debts.
Other mortgage holders will refinance to try to consolidate their debts; the idea of reducing high interest debt with lower interest debt makes sense on paper. However, many people who are refinancing for this purpose alone will not necessarily be saved from their high-interest (ie: credit card) debt forever. It’s likely that they will accrue more high interest debt with the available credit the refinancing has allowed them.
For a great breakdown of how mortgage rates are quoted, view this video by Khan Academy:
In the housing market, it’s common to hear the term “refinancing” come up amongst homeowners. In short, refinancing is the act of paying off an existing mortgage loan and getting a new one to replace it. As with any major financial decision, there are upsides and downsides to refinancing a mortgage, and mortgage holders will look into refinancing for a number of different reasons. The end goal however is always the same: to save some money on some aspect of the loan.
Here are a few of the most common reasons for refinancing:
Switching Between Fixed and Adjustable Rates
There are benefits to starting out with fixed rate mortgages and adjustable mortgages, when first taking out a mortgage loan. But those benefits may erode over time, depending on the state of the market.
If the mortgage holder started out with a fixed rate mortgage loan, it may make sense to start looking into refinancing if the interest rates in the market begin to fall. If it looks as though market interest rates will continue to fall over an extended period of time, switching to an adjustable rate mortgage (ARM) would make sense. With an adjustable rate mortgage, there are periodic rate adjustments (that can adjust up or down). The falling rates in the market would result in both a lower interest rate and a smaller monthly payment for holders of an adjustable rate mortgage.
Important Note: Refinancing to an adjustable rate mortgage needs to be heavily considered by the mortgage holder. If they are only considering staying in the home for a few years, then switching to an ARM in a falling interest market makes sense. But, it’s possible for the rates to increase again over time, so that must be taken into consideration.
Conversely, if the mortgage holder started out with an adjustable rate mortgage, it’s possible for the market to enter a state of steadily climbing interest rates. In this situation, periodic adjustments to the mortgage will result in increased interest rates over time. It would make sense for the ARM to be refinanced to a lower, fixed rate mortgage to avoid continued hikes in the interest rate.
Reducing The Term of the Mortgage
Depending on the state of the market, refinancing to shorten the length of the mortgage is also an option. When there are “record low” interest rates, the loan holders may be presented with the opportunity to get out of a 25-30 year fixed rate mortgage. Refinancing to a lower interest rate can result in a shorter overall term, with a monthly payment that’s around the same as what was already being paid.
Check back soon for more information on mortgage refinacing!
A quick glance at any search results regarding millennials and their home-buying decisions will undoubtedly show a hodge podge of articles with conflicting points of view. So the question remains, are millennials buying or not? Surprisingly, the answer is: yes. But they’re buying differently than the generations before them.
As the millennial generation begins to come of age, it is becomingly increasingly obvious that they are approaching property ownership differently. This is understandable as the recession of 2008 left many under employed, and the subprime mortgage crisis had dire consequences on the market as a whole. Millennials are entering the real estate much more slowly than generations before them, for both economic and social reasons. From an economic standpoint, they are carrying far more student loan debt than ever before. About 71% of bachelor’s degree recipients graduate with loans today, which is up from 64% just 10 years ago. Additionally, the millennial generation has been heavily focused on moving into urban areas (where, from their financial standpoint, homeownership is virtually impossible).
But, the oldest members of the generation are turning 30 now, and the housing market is simultaneously beginning to find health. This means that millennials are actually looking to purchase homes.
Studies show that 35% of home buyers in 2015 were millennials, which was up 3% from 2014. These buyers had a median age of 30 years old, and were purchasing primarily single family homes within suburban areas. Based on the millennial exodus to urban centers (where they were primarily renting space in apartments), it’s very likely that millennials would like purchase homes in those urban spaces if the economy allowed for it. According Lawrence Yun, a NAR Chief Economist,
“The need for more space at an affordable price is for the most part pushing their search further out.”
According to Fortune Magazine, a survey was done to determine where millennials (ages 20-30) were looking to purchase homes. It was found that individuals were actively seeking out places where average wages and home prices worked hand in hand to make for a healthy living situation. Not surprisingly, the areas where millennials were purchasing homes were far away from the coasts, where housing cost are steadily increasing.
Currently, the most popular place amongst millennials looking to purchase homes is Utah. Not only does Utah tout some of the most affordable home prices, Utah County also has the fastest employment growth of the 342 largest counties in the United States.
National Mortgage News has pegged the following cities as the top 10 cities where millennials are buying homes:
- Ogden, Utah
- Minneapolis, Minnesota
- Raleigh, North Carolina
- Salt Lake City, Utah
- Charleston, South Carolina
- Denver, Colorado
- Washington, D.C.
- Seattle, Washington
- Austin, Texas
- Portland, Oregon
As, the millennial generation continues to age, it will be interesting to see how their buying habits develop over time.
According to the Mortgage Bankers Association’s National Delinquency Survey, foreclosure starts have decreased across the board, in the first quarter of 2016.
The Mortgage Bankers Association (MBA) is one of the most reputable and highly recognized sources for data on the residential delinquency and foreclosure rates. For their National Delinquency Survey, 120 mortgage lenders are observed. They sample 41.6 million mortgage loans that are given out by institutions such as banks, credit unions, and mortgage companies. The MBA then proceeds to review and report on both the delinquency rates and foreclosure rates that they observe throughout the sampling.
One of the most significant rates to decrease was the percentage of loans where the action to foreclose was started. In the first quarter of 2016, the rate is 35%, which is down 10 points from 2015 and is the lowest level since the second quarter of 2000. (source)
This downturn in foreclosure can be attributed to two major shifts. One, the qualifications and guidelines for getting a mortgage loan have become much more stringent since the recession of 2008. The Dodd-Frank Wall Street Reform and Consumer Protection Act was put into place under Obama’s presidency; it was a huge reform that was designed to temper and prevent risky business practices by a variety of financial institutions. Under the Dodd-Frank Act, The Consumer Financial Protection Bureau was established to provide regulation over mortgage lenders and brokers. One of the major side effects of that act was the implementation of protections of families from exploitive measures by lenders and mortgage companies.
The second shift took place on the consumer end. After feeling the effects of recession, consumers looking to buy a home have begun to seek education on the real estate market, before reaching out to apply for the loan. More resources have become available on predatory lending, and consumers are now willing and able to arm themselves with that knowledge before moving forward.
As the decrease in foreclosure starts continues, the whole lending market will begin to shift focus. The focus for the past few years has perpetually been stuck on reducing risk. But with the reduction of foreclosures now being evident, lenders will be able to start focusing on expanding access to credit. Their goal can now be on continuing this positive momentum, and creating traction for a new housing boom.
It’s that time to check out Mark Teta’s Official Site where you can find out about his career and expertise.