Gambling on Lower Rates to Refinance
Posted 08/11/09
Interest rates for mortgages dropped recently to an average of just over 5.5 percent for a 30 year mortgage. It was the most drastic weekly rate decrease in almost 30 years. The federal government has designs to drop the rates even lower for home buyers, and the same trend may drop rates for homeowners who would like to refinance. Many homeowners are jumping on the bandwagon to refinance. The last week in November showed a 200 percent increase in refinance applications from just the week before. Some consumers with ARMs are deciding to refinance to a fixed rate offering to give them some payment predictability. Others wish to refinance to simply get a better interest rate or terms to save money on their monthly payments. Unfortunately, lending standards have become much more restricted as a result of the credit crisis. As a result, a lot of consumers who submitted applications to refinance were denied. Lenders are requiring higher credit scores and higher down payments. The decrease in property values for many mortgage holders makes eligibility for refinance more difficult, as some of those consumers have lost significant equity in their homes.Homeowners wishing to refinance will undoubtedly be tempted by low mortgage rates. Some consumers are gambling that the rates will decrease even more. Just as rates go down, rates can go up and you could miss a golden opportunity to refinance. Most analysts advise consumers who are looking to refinance to take the bull by the horns and lock in the low rates. To determine if the refinance would be beneficial for you, you need to figure out if the costs and savings would be worth it for the time you plan to own the property. Subtract the estimated new monthly payment from your current monthly payment to determine how much you would save each month under the new rate. Next, determine how much the fees and costs of the refinancing will run you. Lastly, divide the total cost of the refinance by the monthly savings to figure out how many months it will take you to actually start saving on your monthly payments. This is called your break even date. If you think you are going to sell the house before you reach that break even point, then you may not want to refinance. For example, it may take 15 months to recoup the costs of the refinance. If you expect to sell the house in a year, then the refinance may not be a good financial move.
It is hard to predict what will happen with mortgage interest rates. If you would like to refinance, it may advantageous for you to lock in the low rates now and not gamble that they will drop enough to make a big financial difference for you.
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Home loan -- Refinance mortgage -- Home mortgage -- Home loan -- Home equity loans --