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Refinance or Wait
The end of November, the average interest rate on a thirty year fixed rate mortgage was around 5.5 percent. It was the biggest drop in a week since the 1970s. 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. It was reported the week after Thanksgiving that applications to refinance mortgages were up 200 percent from the week prior. Many who have chosen to recently refinance are trading in an adjustable rate mortgage for the peace of mind of a fixed rate mortgage. 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. That means that many who applied to refinance were not approved. 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.
The low interest rates will continue to entice consumers, particularly those looking to refinance. Some consumers are gambling that the rates will decrease even more. Rates could just as quickly go back up, though, so you have to decide if you are willing to take the gamble. Most analysts advise consumers who are looking to refinance to take the bull by the horns and lock in the low rates. If you are wondering if a refinance makes sense for you, the simplest thing to do is calculate your savings and costs for the time you plan to hold the mortgage. Subtract the estimated new monthly payment from your current monthly payment to determine how much you would save each month under the new rate. Then, add up all the costs of the refinancing. 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 plan to be in the house later than your break even date, it is probably worth trying 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.
No one knows if the current low interest rates will stay steady, increase or decrease even further. 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.
