Thursday, January 31, 2008

Five Considerations For Refinancing Your Mortgage

Since high-yield savings accounts are starting to offer rather pathetic interest

Time to save some money
Five Considerations For Refinancing Your Mortgage
rates - it may be time to consider how to benefit from this sudden reduction in rates. Mortgage refinancing seems to be the obvious option, since mortgage rates are near 2004 lows. But before you visit your friendly mortgage broker you might want to consider the following -

Now or Later
Long-term mortgage rates are tied to long-term bond rates, which may rise if inflation picks up. Short-term loans like home-equity loans and credit card rates could fall further since these loans are tied to short-term interest rates, which the Fed has been hacking at quite vigorously. If you have a high interest mortgage or an adjustable rate ARM - now might be a good time to explore refinancing options. Rates may drop some more but possibility of rates going up again also exists.
"Last week, the average rate for a 30-year fixed mortgage was 5.48%, one of the lowest rates since 2004, according to Freddie Mac's survey."
MarketWatch - Mortgage rates could rise, not fall, after Fed move

Closing Costs
Closing costs are your out of pocket expenses that typically offset the reduction in your monthly mortgage payments. For example if you end up paying $2000 in closing costs and end up reducing your monthly payment by $200 - it will take you 10 months to break even. In other words, after 10 months you have recouped your closing cost expense and can start to reap the benefits of refinancing.

Term
If you have made payments for five years on a 30-year loan and refinance for another 30 years - your monthly payment may be lower but you have extended your loan over 35 years. Is that a big deal? Consider this scenario. If I finance $200,000 at 6.5% interest - in 5 years I will pay $63,000 in interest and build about $13,000 in equity. Yes - $63,000 in interest payments in 5 years. At this juncture if I reset the clock and start a new 30-year loan, I start the payment cycle anew.

The key is to reduce you new loan term to ensure your overall term does not exceed 30 years. When crunching the numbers, look at the overall interest payment for various loan terms to find the right mix of monthly payment and total interest payment.

Shop Around
A quick check online will give you an idea of the various mortgage rates available. Create a consistent list of criteria for your loan which should include at least the following - home value, loan amount, points, term, loan type, pre-payment terms and rate lock cost. Once you have a list - shop around. Mortgage brokers, banks and online resources are all options to consider when shopping. We are talking big money here so shopping around can lead to some substantial savings.

Purpose
With the economy hinging on recession and tough times seeming imminent, this may not be the best time to take money out of your house for discretionary spending. So consider your reasons for refinancing. If the objective is to leverage reduced rates or procure a fixed rate loan - this is definitely an opportune time otherwise rethink your objectives.

A mortgage payment is a significant monthly expense that every prudent investor should consider ways of reducing. These low rates will not last long - so the time to consider your options and act is now.


References
Kiplingers - Time to Refinance
BankRate.com - Fed move may not change mortgage rates

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4 comments:

Mortgage Blog said...

Good article, want to just reiterate the importance of one point. People often underestimate the amount of money that closing costs eatup. Often it's closer to 5-8K after all the dust settles. People need to be careful to factor all costs when refinancing.

Samantha said...

You can refinance even your bad credit mortgage. Bad credit mortgage refinancing will help to save you money. In this case bad credit mortgage refinance is necessary if you need to do a debt consolidation and in most cases can still save you money over time. If your credit history is less than sparkling the most important factor to getting a refinance approved is to disclose these unfavorable marks as soon as possible so we may design a game plan to overcome it. Giving your lender a complete written explanation of every negative credit account will help you and is usually relatively easy to handle.

Richard said...

Hi,
Your article is really excellent. Refinancing for a fixed rate mortgage can lower your rates and give you peace of mind. By setting your mortgage rate today, you know exactly how much your interest will cost and how long your loan will last. Fixed rate mortgages also allow you to buy down the rate, saving you thousands if you keep the mortgage for several years. You can also extend the loan period to reduce monthly payment amounts.

LiveMortgageFree

Sudipta Das said...

I am attending college and was wondering about investing my student loans into something safe like CD's or mutual funds. I am on a full ride scholarship for academics and do not need any loans for tuition and i have a part time job to cover any other bills. I was just wondering if it would be an okay idea to take out maybe 10 grand and invest it in a rather secure fashion. I was thinking something along the lines of CD's or mutual funds or both. What is your opinion?
sudipta das
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