Is it time to refinance? Mortgage interest rates in May 2009 are so low that you may find refinancing tempting. But is it the best time for you?
The first clue that it is time to refinance mortgage loans is that interest rates have dropped at least two percentage points below what you are currently paying. This difference between interest rates is large enough that it is likely to make up for what you will need to pay in refinancing fees. However, you may find that the formula does not fit your situation. If you do not stay in the house long enough for the savings from the lower interest to equal the refinancing fees you paid, you will actually lose money from the refinance.
Another reason to refinance mortgage loans is to get a lower monthly payment. If you are strapped for cash, being able to put less of your earnings into your mortgage can significantly ease your budget. You can lower your mortgage payments by refinancing to a mortgage with a longer term, which means a higher total bill but a smaller monthly bill. Or, if you plan to sell your house within the next few years, you can get even lower monthly rates with a non amortizing loan. When you refinance mortgage loans with a non amortizing loan, you pay only the interest on the loan for a grace period of several years. When the grace period ends, you are responsible for paying the principal off on an accelerated schedule, or even in one lump sum. However, if you sell or refinance the house before the end of the grace period, you get the benefit of lower monthly payments, and repay the balance of the loan with the proceeds from selling or refinancing the house.
If your analysis tells you it’s time to refinance, mortgage interest rates are ideal. On the other hand, your personal situation may not make refinancing a sound choice right now. In that case, wait to refinance; mortgage rates will dip again. Either way, rely upon your sense of your own financial situation, not outsiders’ opinions or articles in the paper, to decide when you should refinance.
October 2nd, 2009 at 3:03 pm
To make variable rate loans even more attractive, many have a feature in which the homeowner can choose to convert the loan from a variable to a fixed rate loan to lock in especially low interest rates when rates fall.
* Fixed rate: Mortgage loans with fixed rates have their interest rates set at the beginning of the loan, and the rates do not change. Fixed rate mortgages are best for when the prevailing interest rates are low and are expected to rise shortly. Taking out a fixed rate loan when rates are low locks in the low rate for the life of the loan, even when market rates rise.
* Points: A measurement of the fees homeowners pay for taking out or refinancing a mortgage.