According to Freddie Mac, 30-year fixed mortgage rates averaged 3.6% through the end of 2016. This means 2016 was the lowest annual average mortgage rates in over 40 years.
As low rates continue to defy the odds, many U.S. homeowners continue to take advantage of the opportunity to refinance.
Homeowners are not only taking advantage of the low rates. They’re also taking advantage of home price appreciation by cashing out some of their equity.
Freddie Mac notes that cash-out refinances grew to 41% in the 2nd quarter of 2016.
WHY HOMEOWNERS ARE REFINANCING
Lower rates can translate to a variety of beneficial reasons to refinance. These benefits will vary according to each homeowner and their particular situation.
Some reasons homeowners decide to refinance may include:
- Lowering your interest rate to open the possibility of shortening your term – paying off your home faster means saving thousands on interest costs
- Lowering your rate to reduce your monthly mortgage payment to free up cash flow
- Converting your current adjustable mortgage to a nice, low fixed rate
- Taking some cash out for home renovations, to go on a vacation, for purchasing an investment property, to pay for college tuition, for paying off debts or other expenses
- Reducing your rate AND eliminating Private Mortgage Insurance (PMI) at the same time
With less stringent underwriting guidelines combined with lower interest rates and increased home appreciation, it’s no wonder that refinance applications made up 64% of the total mortgage applications in early September.
MAKING HOME AFFORDABLE PROGRAM (HARP)
The Federal Housing Finance Agency (FHFA) recently announced that it will be extending its Home Affordable Refinance Program (HARP) until September 30, 2017.
HARP was launched in 2009 as a way for homeowners who are current on the existing mortgage loan, but have little or no equity, to take advantage of low mortgage rates.
HARP was set to expire at the end of 2016. However, with more than 323,000 eligible homeowners who have yet to take advantage of the HARP program, FHFA decided to extend the program for the fourth time and final time.
According to FHFA, by taking advantage of the HARP refinance, eligible homeowners can save approximately $2400 per year on their mortgage payments. That adds up to $12,000 in savings over the course of five years.
FANNIE MAE’S NEW HIGH LOAN-TO-VALUE REFINANCE
In an effort to fill the void that HARP’s expiration will leave, Fannie Mae and Freddie Mac are releasing a new refinance option. This loan program is designed specifically for homeowners with high loan-to-value (LTV) ratios.
This new program, much like HARP, will allow underwater homeowners an opportunity to refinance their mortgages to take advantage of low mortgage rates.
Homeowners must benefit from this new refinance in at least one of the following ways:
- Lower interest rate
- Reduced monthly principle and interest payment
- Shorter loan term
- More stable loan product, such as refinancing from an adjustable rate mortgage (ARM) to a fixed-rate
Homeowners will need to meet certain eligibility requirements in order to take advantage of this new high LTV refinance option.
There won’t be any loan-to-value restrictions for this new program, other than the need for the new mortgage to exceed the maximum LTV for a “limited cash-out” refinance. In other words, it must be a high LTV.
The mortgage being refinanced must be an existing Fannie Mae loan. However, it cannot be a previously refinanced HARP loan.
At least 12 payments must have been made on the loan being refinanced.
Homeowners must be current on their existing mortgage with no 30-day late payments within the last six months. Only one 30-day delinquency is permitted within the past 12 months.
FREDDIE MAC’S ENHANCED RELIEF REFINANCE
Fannie Mae’s sibling, Freddie Mac, also unveiled its own version of the high loan-to-value refinance program.
Freddie’s high LTV option will be known as the Enhanced Relief Refinance.
For the most part, Freddie Mac’s version will mirror the Fannie Mae program in its entirety. The primary difference is that the homeowner’s mortgage must be an existing Freddie Mac loan.
The Enhanced Relief Refinance Program will replace Freddie Mac’s Relief Refinance Program, also known as Open Access.
With mortgage rates predicted to remain at historically low levels through the end of 2016, and into 2017, there are lots of reasons for homeowners to consider refinancing.