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2015 starts with an opportunity for buyers and owners

Victor Polich
Mortgage Banking

Homeowners and prospective buyers are getting a big post-holiday treat. Average rates on 30-year fixed-rate mortgages have fallen below 4%, making homeownership more affordable for some.

Young couple smiling at each other and packing away newspaper-wrapped dinner plates.These rates, which are close to historic lows, create opportunities for both buyers and owners. Average rates on 30-year, fixed-rate mortgages dropped to 3.73% in the first week of January, down 70 basis points from an average of 4.43% for all of January 2014.

Buyers may save with lower rates

If you are thinking about buying, consider that home affordability is made up of several key drivers, including home prices, interest rates, and property taxes. So (other factors being equal) the recent interest rate dip is helping to increase home affordability. What does a 70-basis-point drop in rates (from 4.43% to 3.73%) add up to?

Here’s a simple example using our online mortgage calculator. If you put 20% down on a $250,000 home a year ago and received a $200,000 30-year mortgage loan with a fixed rate of 4.43%, your monthly principal and interest payment would be $1,005.

If you put down 20% on a $250,000 home this month and received a $200,000 30-year mortgage with a fixed rate of 3.73%, your monthly principal and interest payment would be $924 — a savings each year of $972.

Homeowners: Is it time to refinance?

For homeowners, large drops in mortgage rates always raise the prospect of refinancing. To help you sort out what to do, here are five questions to consider right now, with rates on 30-year, fixed-rate mortgages hovering near the lows last seen in May 2013.

1) Is it worth your while to seek a lower mortgage rate? As general guidance and depending on how long you have left on your loan term, if rates are half a percentage point lower than the rate on your current mortgage, you may want to talk to a lender about refinancing. If you can lower your rate by at least 50 basis points, then the lower mortgage payment will likely offset the upfront refi expenses, such as the appraisal cost and lender fees.

2) Can you afford higher payments as a way to save money in the long run? Maybe your financial picture has improved and you are in a position to make a higher monthly payment now. If so, you may want to look at a 15-year mortgage, which may carry a lower interest rate than your current mortgage and save you money over time. In the first week of January, when 30-year mortgages averaged 3.73%, the average rate on a 15-year fixed-rate mortgage was 3.05%. The monthly payment on a 15-year mortgage will likely be higher, however, because the repayment period is shorter than on a 30-year fixed-rate mortgage.

3) Do you have equity in your home that you want to tap? Another option to consider is a cash-out refinance to withdraw increased equity you may have in your home. Do you have imminent expenses that you may need cash for, such as home remodeling plans or kids heading off to college? If you have increased equity, you may be able to refinance to take out some cash to help cover current or future expenses.

4) Would you be more comfortable with stable payments? Homeowners with adjustable-rate mortgages may want to capitalize on the current low rates to move to a fixed rate to provide payment stability for the long term. Compared to fixed-rate mortgages, adjustable-rate mortgages tend to carry a lower initial rate that adjusts in the future as interest rates fluctuate up or down, affecting your monthly payment.

5) Are you paying mortgage insurance? If you put down less than 20% on your home, then you most likely are paying mortgage insurance, which lenders typically require to protect them from the added risk on high loan-to-value mortgages. Borrowers, for example, with FHA loans, which are available with as little as 3.5% down, are required to pay mortgage insurance for the life of their loans. If you’ve lived in your home for a few years, it’s possible you have more than 20% equity and may be able to qualify for a new, non-FHA loan and avoid having to pay mortgage insurance.

Whether you’re a prospective buyer or a homeowner, this may be a good time to talk to a lender about current mortgage rates and options that may be right for you.

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