The demand quickly became overwhelming for lenders to keep up with. At the same time, most borrowers get a lower interest rate when they refinance, meaning the lender earns less money over the life of the loan.
Because mortgage lenders are in the business to make money, many raised refinance rates a bit to maximize profits where they could. Lenders have been so flooded with requests for new mortgages and refinancing that many decided to focus their attention on where the most profit is found -- originating new loans.
For some, that meant reducing the number of loans they're willing to refinance. Some have also tightened loan qualifications. Right now, homeowners are anxious to harness a new, lower APR through refinancing. And they seem to be willing to pay more than the amount new home buyers are paying for their mortgage loans. To understand the risks involved, it helps to know about the three types of mortgage loans.
New mortgage origination: Whether the loan is for a first-time buyer or a veteran buyer, the purpose of these mortgages is to fund a home. New mortgage origination is the bread and butter of any mortgage lender, so this type has the lowest APR.
Rate-and-term refinance: Homeowners who refinance their principal balance without requesting cash out from the equity are known as rate-and-term borrowers. That's because all they want is to lower their interest rate and reset the term of their loan. If all that borrower wants to do is refinance the loan at a lower mortgage interest rate and reset the terms for another 30 years, the default risk is not likely to change by much.
In fact, now that the mortgage payment has decreased, the risk may also be lower. However, if the same borrower opts for a or year mortgage, the monthly payment may increase, even if the mortgage rate goes down. That borrower could be at higher risk of default. That's why rate-and-term loans are typically offered at a higher APR than loans offered to new home buyers. Cash-out refinance: When a borrower requests a cash-out refinance , that means they want to change the loan rate and loan term of their mortgage while also taking money from the equity in their home.
The lender will require them to have a professional home appraisal to determine how much the property is worth. Not only does their loan-to-value ratio go up, but their debt-to-income ratio also rises. These borrowers are typically offered a higher APR than other borrowers because their default risk is greater.
Like all types of loans, the specific interest rate you're offered depends in large part on these three factors:. No matter what type of loan you apply for, make sure your credit is in good shape. If your credit is poor and you can wait to refinance, it pays to take steps to raise your score before applying. Refinancing your mortgage could save you hundreds of dollars for your monthly mortgage payment and secure you tens of thousands of dollars in long-term savings.
Our experts have reviewed the most popular mortgage refinance companies to find the best options. Four weeks ago, the rate was 3. The year fixed-rate average for this week is 0. While that move creates upward pressure, mortgage rates are unlikely to spike as a result of the taper.
The Mortgage Bankers Association, for instance, expects the average rate on a year mortgage to reach 3. Mortgage experts offer mixed predictions about the direction of rates in the next week. Rates are a cut above the record lows reached earlier this year, but refinancing remains a historically excellent deal.
The rate on year bonds issued by the U. The year Treasury is closely tied to year mortgage rates. Economists generally expect rates to rise by the end of As mortgage rates make a predicted slow climb to the 3. Those looking to refinance should be able to find good deals for the rest of the year, though at rates at bit higher than the current level.
The bottom line: If you see a rate that fits your needs and budget, the time to do that refinance could be now. The Bankrate. To conduct the National Average survey, Bankrate obtains rate information from the 10 largest banks and thrifts in 10 large U. In the Bankrate. Each week Freddie Mac surveys lenders on the rates and points based on first-lien prime conventional conforming home purchase mortgages with a loan-to-value of 80 percent.
How We Make Money. Jeff Ostrowski. Written by. Jeff Ostrowski covers mortgages and the housing market. Before joining Bankrate in , he wrote about real estate and the economy for the Palm Beach Post and the South Florida …. Edited By Bill McGuire. Edited by. Regardless, purchase mortgages default the least, followed by rate and term refinances, and finally cash out refinances, the last of which actually makes sense.
Interestingly, the loan characteristics also indicate that cash out refis and purchase mortgages should default at about the same rate, yet they are priced the furthest apart. So when you compare mortgage lenders, you might often find that purchase rates are the cheapest, followed by rate and term refi rates, and finally cash out mortgage rates.
I looked around and found that Chase, Citi, and Wells Fargo offer lower home purchase rates, while Quicken Loans offers the same exact rates for purchases and rate and term refis. One last thing — pay attention to the assumptions lenders make when they list their rates. But know refinance rates are higher because they default more than purchase loans, and that requires a higher price to compensate for heightened risk, plain and simple.
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