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It wasn't that long ago that interest rates hit an all-time low and frenzied homeowners went wild refinancing their mortgages. In fact, it was just last winter that home buyer loans were taking longer to close because of the backlog of refinance loans moving through the system. Many homeowners have no idea that there is still a great opportunity to be had right now when it comes to refinancing a mortgage. The key is to understand whether refinancing would be beneficial or detrimental to your current situation.
Is Refinancing Really Still An Option?
According to Freddie Mac Weekly, fixed-rate mortgages are at a low for 2011 already. In fact, the average interest rate on a 30 year fixed-rate mortgage has gone down from 4.6% in July to 4.12% as of October. The 15-year fixed-rate mortgage rates have also decreased from an average of 3.75% in July to 3.37% in October.
Many homeowners felt like they missed out on a great opportunity to refinance last fall, so they are interested in pursuing the opportunity this time around. No one can really predict interest rate fluctuations with total certainty, so waiting too long to refinance could be a roll of the dice. However, not every situation is suited to being a candidate for refinance. That is why it is important to know your numbers and speak with a qualified, experienced mortgage lending professional.
How Do I Know if I Should Refinance?
There are a couple of factors to consider when it comes to refinancing a mortgage. First, borrowers must realize that the points associated with a refinance are normally not considered to be prepaid interest so they cannot be deducted on taxes. Lenders often spread these over the life of the loan for that reason. Some lenders also suggest a par value loan to eliminate points although the mortgage rate will be a bit higher.
In 2006, the rates were so low that some people kept refinancing over and over again. Many of them paid closing fees over and over too, which might have been a bad financial plan in the grand scheme of things.
Look At The Numbers To Plan Your Strategy
The key to knowing whether you should refinance is how long it will take to save enough money on your monthly payment to account for the money you spent up front in fees. For instance, let's use an example of an original loan of $195,000 at 5% for 30 years with an unpaid amount of $189,999. If you pay $1,500 in refinance costs to get a new interest rate of 4.5% over 30 years, you will save $81.07 per month. It will take about 1 year and 7 months to recapture that $1,500.
When you look at this example, you need to consider your future plans. For instance, if you plan to look for a new job in another state within the next year and a half or so, it probably won't make sense to refinance. However, if you plan to raise your family in this house and live there for another 10 years, then refinancing is probably a great idea in that situation.
When refinancing, it is not just about the numbers. It is also about planning for the future with some forethought. If you don't love your current home or you plan to upgrade to a larger place, it might make better sense to buy a new home instead of refinancing. There is no “one size fits all” approach to this.
Don't Forget About The Mortgage Insurance Premium
Another important point to note is that the Mortgage Insurance Premium for FHA loans has increased. This is yet another number to keep in mind as you decide whether refinancing will be of benefit to you. It could cause your payment to be higher which might negate the effects of a refinance.In the end, speaking with a mortgage professional is the best route to take when trying to figure all of the numbers associated with refinancing. You might not know all of the pertinent facts and figures, but a good lending professional certainly will. As a real estate professional, I have connections with some of the best mortgage loan officers in the area. Give me a call so that I can refer you to someone who will be glad to do all of those calculations for you!
