Refinancing Blues: Is Your Mortgage Rate High

refinancing optionsAfter 4 years of economic melt down, US mortgage interest rates are at their historical low. The average rate has dropped from about 6.35% for 30 year fixed loan in 2006 to the current 4.1%. But as per the latest data released, approximately 69% of American homeowners are serving their mortgages at 5% or higher and about 33% of them have to pay even 6% or higher.

This is a unique situation and might be a call for policy and regulatory intervention. Let us try to analyse, what may be the reasons for this situation that when the refinancing options are available to homeowners but still some of them are not able to utilise them for their own benefits.

Top 5 Reasons why Home Owners do not utilize Refinancing Options

  1. Procrastination: The first and foremost reason, why people fail to exercise the refinancing options, is their own procrastination. They simply fail to pay attention to the options available and some of them are unable to evaluate the refinancing option vis-a-vis their current mortgage. Please understand that today is the best time for refinancing your current mortgages as the Mortage rates are at their historical low at present. You might end up saving a lot of money by refinancing your costly mortgages. Consider the use of refinancing calculator we have on this site to evaluate different refinancing options available to you.
  2. Negative home equity: This is the most common problem because of which home owners are not able to refinance their current mortgages even after being fully aware of the present cheap refinancing options. The economic meltdown 4 year back resulted in plummation of the property prices to such an extent that the market value of the homes reduced to well below the loan taken to acquire them. It is estimated that more than 11 million home owners in United States are currently set builder with negative equity on their homes which prohibits them to exercise refinancing options to get a better interest rate.The only option here is to make some lump sum payment and reduce your LTV, the loan to value ratio. If you can arrange finances to make some lump sum payments then it may go a long way to make you qualify for the refinancing options and reduce your interest burdens to a great extent.
  3. Bad credit or low credit score: Maintaining a good credit rating and credit score is the key to get the best available refinancing rates. If you are able to create a good fico credit score of say 720 or above, you might be in a position to exercise your bargaining power and get a good refinancing of at low interest rates. Don’t forget to check our blog post to find how to improve your credit score.
  4. Refinancing fees: The cost of refinancing varies a great deal depending upon the offer you choose. But remember some of the refinancing fees are always negotiable and you can get a good deal if you know the intricacies involved in the options available to you. It is important to keep these factors in mind while evaluating the refinancing option because they are the key factor is to determine when you will be able to break even in your refinancing option.
  5. Low DTI, debt to income ratio: Lenders always hesitate to lend money in case you’re DTI or debt to income ratio is not very favourable. This means that a major portion of your current monthly income is spent in servicing your debt burden. The only option available here is to increase your income levels or reduce your debt burden. A low DTI means availability of cheaper refinancing options ensuring lesser interest payout and less costly loans.
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Lots of approximations and assumptions have been made while developing the calculators.

Please make your own calculations before making any financial decision.