Should You Refinance Your Home In 2007?

Home Refinancing in 2007

With many experts predicting a rise in interest rates in 2007, expect a flurry of refinancing activity as new home owners seek to bail out of adjustable loans.  Whether the rates increase at a slow and steady pace or in short bursts is anyone’s guess, but as both home buyers and sellers confront falling home values, all eyes are on the Federal Reserve Board.  Mortgage bankers believe that home owners who took out adjustable-rate mortgages or ARMs during the real estate boom will likely pay a price this year, especially those who opted for some of the non-traditional choices such as interest-only and pay-option, which featured enticingly low monthly payments.

What you want to avoid is putting yourself in a situation where you owe more than your new home is worth.  You don’t want to lose your house to foreclosure or have to sell your home at a considerable loss because you can’t meet the accelerated monthly payments.  How do you assess the risk and what can you do turn the situation around?

Are You House Poor? - Being house-poor can lead you straight to the poor house. Rising interest rates plus falling home prices can be a recipe for financial disaster if you’re not prepared.  Home owners in every state but Alaska shelled out a higher percentage of their income on housing costs in 2005 compared to what they spent at the beginning of the decade, according to the U.S. Census Bureau. Alaskans allocated the same.

Did you jump on that interest-only or no down payment option to purchase as much home as you could possibly get?  Are you reducing your contributions to your retirement plan, depleting your rainy day savings, or deleting the dining out expense category in your money management software program for your piece of the American dream?

Is too much of your net worth dedicated to the mortgage and house maintenance resulting in a severely restricted cash flow?  Many experts suggest spending no more than 30 percent of your income, minus taxes on a new home.

If you owe more than your house is worth, you are in a risky situation.  Holders of interest only and pay-option ARM mortgages, pay attention. If the rise in short-term interest rates during the last two years has increased your monthly mortgage payment to the point of distress, what are you going to do if you can’t pay the minimum payment on your mortgage if rates continue to rise?

Those who purchased houses in recent years with little or nothing down in neighborhoods where home values are tumbling, need to re-assess now, as do buyers who are struggling to make the minimum payment on pay-option ARMs, where they put down 10 percent or less. If you took out a non-traditional loan that allows you to make a minimum payment that doesn’t cover the month’s interest, and you exercise that option, your loan principal will rise and you are now in a position where you owe more today than when you took out the loan. Not good.

The first thing to do is take stock of your financial situation. Get a reality check now. You may not be eligible to refinance if you’re low on cash and equity. Pare your budget down to the bone. Do you really need two cars? The premiere cable channels? Cut down on the nights out and the lattes. Put the vacations on hold.  Perhaps you can get a part-time job for a while. Get your credit card debt paid down and keep your credit report clean. Do everything in your power to make the monthly mortgage payment and put order back in your budget.

If you have the cash flow and the credit rating, consider refinancing now.  Make an appointment with your lender and inquire about your options.  Talk to other reputable loan officers and mortgage bankers to sort through the wide variety of mortgage offerings out there. If you are in over your head, you don’t have time to wait for a rock-bottom rate, and even if you did, you wouldn’t know that you got it until after the fact. Home values and interest rates rise and fall and even the best of the best don’t forecast right on the money all the time.   You might want to also consider taking advantage of this buyer’s market if you can sell your house and cut your losses and downsize into a more affordable home.  On the other hand, if your current financial picture is bright, this can be a good time to purchase a new home.  Economists predict a stronger buyer’s market this year with lots of inventory.

A good rate is good enough, especially when you don’t have the resources to hold out for what you believe is the absolute best.

With the proliferation of mortgage products today, it can be confusing to sort through your options.  Signing up for a traditional fixed-rate mortgage may cost you more in the short-term but if lock in a good fixed rate now, you can rest a little easier for years to come.  And if you’re ready to buy a new home, an exclusive buyer’s agent can become your new best friend in this market.  He or she is up on the latest in mortgages and interest rates and can likely refer you to several reputable lenders who can educate you on the choices available. Only you can determine the price for peace of mind.

Whether you decide to refinance or buy a new home, remember this: Although no one can predict with absolute certainty how interest rates will move, it’s always wise to consult an expert to help you determine your mortgage strategy for 2007.

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