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Information on mortgages, home equity loans, and consumer credit to help you use the power of financing to your advantage.
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Mortgages > Refinance
How do I decide whether it's wise to refinance my mortgage?
ADAM GELLER, AP Business Writer. Associated Press
Copyright Associated Press
Q. All those headlines about interest rate cuts have me thinking about refinancing the mortgage on my home. But given that I already have a low interest rate, what factors should I consider in deciding whether refinancing makes sense?
A. Ten rate cuts by the Federal Reserve this year have taken interest rates on home loans to near-historic lows, making this a very good time to be a mortgage shopper.
For the week ending Nov. 2, borrowers taking out 30-year fixed mortgages were averaging an interest rate of 6.56 percent, down from 7.73 percent a year ago. The only time the average rate was lower during the past 30 years was in late 1998 when it briefly reached 6.49 percent, according to Freddie Mac, the corporation chartered by Congress to replenish the supply of funds in the loan market.
"If a borrower has a loan with an interest rate over 7 to 7.25 percent, and intends to stay in their property for a while, they should consider refinancing today," said Brad Blackwell, national sales manager for Wells Fargo Home Mortgage.
But just because rates are low doesn't mean everybody should be refinancing. Instead, homeowners need to assess their individual circumstances and compare their current loan rate _ which might already be quite low if you've bought in recent years _ with the costs and savings associated with a loan refinanced at a lower rate, experts said.
First, estimate how long you expect to live in your current home. While there's no set rule, it probably does not make sense to refinance if you expect to move out in two or three years since it will likely take that long to recover refinancing costs through lower monthly payments, particularly if you already have a low mortgage rate.
Appraise your situation. Many consumers have lost jobs or racked up debts recently, and such problems may make it more difficult for them to qualify for the lowest-rate loans, said Holden Lewis of Bankrate.com, a personal finance website.
Some borrowers who are seven or eight years into a loan may also want to pause, since they're just getting to the point where their paying down large amounts of principal. A refinanced loan, even at a lower rate, means most of those monthly payments will again go to paying off interest.
For borrowers who hold an adjustable rate mortgage (ARM), however, this could be an ideal time to lock in at a low rate.
Next, look at your current rate and monthly costs and compare them to rates and costs now available. A number of lenders have online mortgage calculators that can help you do this. By way of example, a $135,000 loan at 8 percent equates to $991 a month in mortgage costs, while the same loan at 6.5 percent will cost a borrower $854 a month, a savings of $137 a month.
Now, shop around.
Make sure to include your current lender in your research, because it might be able to save you money. Since they already know homeowners and their properties, many lenders will waive costs like appraisal fees to refinance loans of present customers, experts said. They also might look at your record of past payment rather than your current income.
Shopping around is a good idea because it gives consumers an idea of all the different options out there. It also helps because lenders will compete for your business, sometimes offering more favorable terms rather than lose you to the competition.
The challenge is to make accurate comparisons since there are so many loan products available. As you evaluate the choices, consider the implications. A 15-year mortgage will get you a lower rate, but can you afford the higher monthly payments? Paying points _ a single point is equivalent to one percent of the loan amount _ will also cut the rate, but how long will it take you to justify the extra costs?
A loan officer can help in making comparisons, but only consumers know what makes the most sense for them. End adv for use anytime
• Apply now for a home loan!
Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission.
Dateline: Undated
Text Word Count 678
The tips on this website should be considered food for thought only. Lendingtips.com is a clearinghouse of ideas, not a professional adviser. Before any important decision, please consult the appropriate professionals (lawyer, accountant, real estate agency, broker etc.).
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• Mortgages > Refinance Articles Archive.
• ARM vs. Fixed Rate Mortgage. Use this calculator to compare a fixed rate mortgage to two types of ARMs, a Fully Amortizing ARM and an Interest Only ARM.
• Mortgage Loan Calculator. Use this calculator to determine your monthly payment and amortization schedule.
• Refinance Breakeven. Should you refinance your mortgage? Use this calculator to determine when you will breakeven!
• Amortizing Loan Calculator. Enter your desired payment - and let us calculate your loan amount. Or, enter in the loan amount and we will calculate your monthly payment!
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