Low Mortgage Rates Promote Refinancing

Posted by  on Oct 08, 2009

If you're considering a mortgage refinance, now is a good time to do it. Refinance rates are low, and no one knows when they'll start rising steadily. Mortgage lenders report that a large majority of their business is coming from homeowners refinancing existing mortgage loans. Here are some ways that refinancing your mortgage loan can help you improve your finances:

What Refinancing Can Do:

Reduce mortgage rates: This is the most popular reason people refinance mortgage loans; reducing mortgage rates saves money and lowers your monthly mortgage payment. It may be possible to reduce your principle and interest payment (P&I) with a rate reduction of as little as one half percent, but your total savings depends on how much you're paying for your refinance mortgage including closing costs and points.

Reduce or extend mortgage repayment term: You can refinance from a 30 year mortgage to a 15 year mortgage; this can help you save thousands of dollars in interest, but requires a higher monthly payment. If you have a 15 year mortgage and want to reduce your payments, you can refinance to a longer repayment term, typically 20 or 30 years. This option could help if you've experienced an unexpected long term reduction of income.

Stabilize monthly P&I payment: Refinancing from an adjustable rate mortgage (ARM) to a fixed rate mortgage provides consistent P&I payments

Change mortgage terms: If your existing mortgage has any of these features, it's time to consider a mortgage refinance to a fixed rate mortgage (FRM):

  • Interest only payments: Your mortgage balance will not go down as long as you're paying interest only.
  • Deferred interest payments: Some loans allow for very low initial payments that aren't enough to cover even the interest accrued. The unpaid interest is added to your mortgage balance, so you're balance is increasing instead of decreasing as it would with a fully-amortizing mortgage.
  • ARM with very high "caps" or any ARM to FRM: Adjustable rate mortgages usually adjust on a schedule according to how specific financial indexes perform. Most ARM loans have caps, or limits on how much rates and payments can adjust. If you have an ARM very high rate caps, refinancing your mortgage to fix its rate and payment can be a healthy decision. Many homeowners refinance from ARM mortgage loans to FRM loans when rates are low.

Comparing your current mortgage rates to potential refinance rates doesn't provide accurate estimates of possible savings. Considering the costs of refinancing is important for making accurately assessing benefits of refinancing:

Closing costs: Refinancing a mortgage involves getting a new loan to pay off your current mortgage. You'll have to go through an application process that involves a home appraisal, getting approved by your refinance mortgage lender, and paying title and closing costs. Closing costs must be considered for accurately determining your savings. A refinance calculator can help you see potential savings and how long it takes to recoup the costs of refinancing. Keep in mind that the difference in payments doers not represent your true savings; if you have 25 years to go on your current loan and you stretch it out to a new 30-year loan, your payment would drop even if your rate didn't change. And yet your costs over the life of the loan would be higher.

Points: One point is equivalent to one percent of your mortgage refinance amount; if you're refinance mortgage is $300,000 and you're being charged one point, you'll have to add $3,000 to the cost of refinancing. Points are usually paid to get the best available interest rates.

Expected length of home ownership: How long will you stay in your home? Refinancing may not make sense if you're moving in two years and it will take longer to break even on refinance costs. Another reason to consider how long you'll keep your home (and refinance mortgage) is for choosing what type of mortgage you want. Refinancing to an adjustable rate mortgage (ARM) can help you save money if you'll sell your home before your initial mortgage rate adjusts.

Get several mortgage quotes and contact mortgage lenders with questions. Finding the right loan for your needs can help you get the most from your new mortgage.




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