Wednesday, January 27, 2010

Determining When To Refinance Your Mortgage

Interest rates have dropped to all-time lows in the past few months, as the US government continues its efforts to jump start the housing market and overall economy. The Fed has spent massive amounts of money the past year via a $300 billion treasury buyback program and $1.45 trillion MBS purchase program, all in an effort to keep mortgage rates low. This, in addition to key housing bills recently passed by the Obama Administration such as the Homeowner Affordability and Stability Plan and the Home Affordable Modification Plan, have many saying that now is an ideal time to refinance.

While it’s true that the low rates currently available will eventually increase once the Fed wraps up purchasing mortgage-backed securities in March, and many governmental housing programs set to expire soon, a refinance is a big financial investment and should not be taken lightly. The key thing about refinancing is knowing when to go through with the process, as it might not be a good idea in certain situations. Below are a few general things that you might want to think about if considering a refinance mortgage:

1. The interest rate on a new loan
2. Associated closing costs and lenders fees
3. The amount of time you plan on staying in your home
4. How much equity you have built up in your home
5. Your credit score

Obviously, the biggest factor to most borrowers when refinancing is lowering their interest rate so that their monthly mortgage payments are lowered. A commonly cited rule of thumb is that refinancing is only beneficial if the interest rate on your existing mortgage is two points higher than the current market rate. However, if there are other factors involved in your refinance decision, such as changing the structure of your mortgage or changing the term, than the two points rule probably won’t play as big a part.

The associated fees and costs are also major points to consider when looking at refinancing. Generally a refinance costs around 3-5% of the amount outstanding on a current home mortgage. Therefore, in order to benefit from refinancing, you must stay in your home long enough to recoup the costs associated with the process. If you don't plan on staying in your home for long, then the lower payments most likely won't cover your closing costs. The point where the savings realized in interest exceeds the total cost of the refi is the break even. Use an online mortgage calculator to figure out your break-even and potential refinancing savings. Quicken Loans has a pretty good refinance calculator on their website that I found very helpful. You can check it out as well as some of the other calculators they have for yourself on their website HERE:.

Another thing that you’ll need to look at is of you have enough equity in your home for a refinance. The amount of equity that a borrower has will determine whether they will be approved for a refinance as well as determine what interest rates they qualify for.