In light of near-record lows on mortgage rates, people are rushing to refinance with possible huge benefits in store. Even as rates would continue into early 2013, Vahe Hayrapetian hopes the flow of people remains—especially considering unlikely and overlooked benefits.
By Kevin Hewston
The Los Angeles Times reports that mortgage interest rates have decreased yet again. In fact, the latest decrease approaches a new record. Mortgage buyerFreddie Mac released their latest survey Thursday that showed the decreases. The average rate of a 30-year loan dropped two percentage points, from 3.34 percent last week to 3.32 percent. The rate for a 15-year mortgage descended one percentage point, from 2.67 percent to 2.66 percent this week.
A record for 30-year loans was set Nov. 21. The average rate then was 3.31 percent.
“The shorter-term fixed loans have proved popular this year with homeowners refinancing to retire mortgages faster,” the article says.
According to Freddie Mac, similar rates will continue into at least the first half 0f 2013. This is generally good news to anyone wishing to refinance or buy a home next year.
And the Fed promises to keep interest rates low by buying bonds and securities monthly. That would keep up until national unemployment is below 6.5 percent around 2015.
Short-term fixed-rate mortgages (FRM) tend to have lower interest rates than long-term mortgages. Although you pay off your loan sooner, your monthly payments are usually higher due to paying more of the principal each month. But because you pay off your loan sooner, the amount paid towards interest is reduced.
A long-term mortgage does the opposite. Such a mortgage reduces your monthly payments, but there are two main downsides. One is that you take longer to pay it off. Another is that the total amount you pay towards interest increases because of the time taken to pay it off.
Refinancing usually means that people have more dollars in their pocket with low monthly payments due to lower mortgage rates. As a result, spending increases—beneficial for the housing market.
However, there is an added benefit to mortgages. And that’s the interest rate tax deduction (MID). It allows homeowners to reduce their taxable income each year by the amount of interest paid on the mortgage. This deduction can be applied to a principal residence or even a second home. But most people, according to Moody’s and others, don’t take advantage of the deduction because they don’t itemize.
Only about 40 million homeowners take advantage of the deduction each year to a tune of $2,200 annually. That number could go up if taxpayers were more scrupulous about filing their yearly returns. Obama is not likely to retire the MID because of its benefits to the middle class, a population he promised to protect on the campaign trail.
Any refinancing is good, according to Vahe Hayrapetian. Right now is a good time to refinance since interest rates are low.
Vahe Hayrapetian sees the benefits and drawbacks to both types of FRMs. To some homebuyers, long-term mortgages may be beneficial in these tough financial times.
About: VaheHayrapetian is a Mortgage Banker with almost 15 years of experience. Currently, he works for Skyline Financial Corporation in Glendale, Calif.