Recent trends suggest refinancing opportunities may continue in 2013

January 11th, 2013

It's a tough trick to pull off -- having home prices rise while consumer prices fall. However, that's just what the recent trend has been. If this keeps going, it could create new refinancing opportunities for American home owners.

Two keys to refinancing

One question about refinancing can be readily answered by a mortgage calculator: Have interest rates fallen enough to make a new loan cheaper than an existing loan? A refinancing calculator can do that math for you, factoring in the terms of your current loan, where mortgage rates are now, and any closing costs.

The steady decline in mortgage rates over the past several years has already brought a favorable answer to this question for millions of Americans. Whether or not new refinancing opportunities emerge depends largely on whether mortgage rates continue to fall.

A second important factor in refinancing is the value of the property relative to the remaining loan balance. Many home owners have been prevented from refinancing because declining home prices meant they owed more than the property is worth. This problem can be solved over time by paying down loan principal, but it can also be solved more quickly if home prices recover.

Recent developments

Recent developments bring good news with respect to both of the keys to refinancing discussed above. With mortgage rates below 3.5 percent, it seemed they had fallen as far as they could possibly go, since they had already dropped to about the long-term rate of inflation. However, the Bureau of Labor Statistics announced that consumer prices actually dropped in November. If deflation, or at least near-zero inflation, were to continue, it would effectively remove the floor beneath mortgage rates, clearing the way for them to drop further.

Meanwhile, though housing prices are still far from regaining their peak levels, they have been recovering steadily in recent months. The S&P/Case-Shiller Home Price Index has risen for nine consecutive months. If this trend continues, home owners who have been steadily paying down mortgage principal may find that rising home prices soon help with the task of getting the loan value below the property value, clearing the way for refinancing.

In short, record low mortgage rates made 2012 a great year for refinancing, but there are reasons to think there may be more to come in 2013.

Posted By :

Richard Barrington has earned the CFA designation and is a 20-year veteran of the financial industry, including having previously served for over a dozen years as a member of the Executive Committee of Manning & Napier Advisors, Inc. Richard has written extensively on investment and personal finance topics.

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