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Current home mortgage interest rate and refinance options: Could this be the best time to refinance?

Current home mortgage interest rate is one of the most important factors in evaluating refinance options. Home mortgage interest rates have been on the downward trend for the past few years. The past few weeks however have witnessed a surge in interest rates.

rising ratesRising rates they are not anywhere near where they were 5 years ago when interest rates peaked in the mid-6% range, but they are on the rise. The average 30 year fixed interest rate on July 112013 according to Freddie Mac is 4.51%.

If the upward trend persists, you’ll see a continued reduction in savings in your monthly home mortgage payment. As history suggests, we may be looking at a bleak future as far as interest rates are concerned. While the rates are beyond your control, there are still things you can do to influence what you end up paying.

Read on to know the benefits and the dangers your might encounter in case put off refinancing any longer.

More debts and higher home mortgage interest rates can derail any chance of refinancing

Most people have debts ranging from credit card bills, mortgage payments, car loans and installment loans. These are all factored in calculating your debt- to- income ratio. Your debt to income ratio is calculated by divided your monthly debts by gross monthly income. To ensure the lowest rate when refinancing keep you’re debt to income ratio below 45% and mid credit score at 740 or higher. If your current DTI is over 45%, it might be difficult to qualify for the lowest rates in the market.

If home mortgage rates continue to rise, this will lead to fewer borrowers qualifying for a refinance or receiving a benefit from a refinance. Simply put: refinancing no longer makes sense since the costs outweigh the savings. To illustrate how increases in interest rates impact qualifying, let’s take a couple who make a gross income of $5,000. Let’s compare a refinance into a 30 year fixed at 4.51% and then using a rate of 5.76% as it was in January 2008. Using a loan amount of $240,000, property taxes of $300, homeowners insurance of $60 and all other minimum monthly debts of $600 let see how this plays out for the borrowers.

Their new monthly home mortgage payment would be $1,217.47 at 4.51% interest rate; their total debt to income ratio would be 44 percent of income. This is 1% below the 45% max DTI ratio allowed, and they wouldn’t have any problems qualifying with most lenders.

Taking the same home mortgage rate at 5.76% would translate to a monthly home mortgage payment of repayment of $1,402.10. This is an increase in the mortgage payment by $187.63 monthly. Adding the property taxes of $300, homeowners insurance of $60 and all other minimum monthly debts of $600 the borrower’s debt to income would result in a DTI ratio of 47%. A debt to income ratio of 47% would make them ineligible to refinance with the majority of the lenders out there.

What options do you still have?

If you fail to qualify due to increased interest rates there may still be options for you. You can look into buying down the interest rate in order to lower your DTI. The mortgage term for buying down an interest rate is called a discount. This is done by paying points which is a one-time charge paid to the lender for reducing the interest rate. Hence, your discounting the interest rate over the life of the loan. I always recommend trying to get a .250% reduction of every 1% paid in discount points. You can also simply payoff existing debts reporting on your credit report.

Refinancing your loan last year may have been the best decision. However, you still have not missed the boat. It may be better refinance now, rather than waiting any longer since interest rates can reach the 6’s again!! Simple mortgage calculators can show you that the difference between what you end up paying for a loan over the life of the loan should you refinance into today’s rates. It’s important to consider the effect of increasing interest rates will have on your monthly payments should you put off refinancing and rate continue to rise.

It wasn’t long ago every TV and radio advertisement for a mortgage preached rates are at all time lows for what seemed like years. Be prepared to see mortgage companies peddling adjustable rate mortgages to lure in business since this loan carry lower interest rates.

Maybe the honeymoon with home mortgage rates in the 3s is over and it’s time to face the new reality. History shows that rates in the mid 4s are still very low and putting off refinancing may prove costly. If you want to refinance a home mortgage because current home mortgage interest rate is low, you are doing the right thing because  low interest rate would help you lower the monthly payment.

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