How Do I Know if I Should Refinance?

Interest rates for mortgages dropped recently to an average of just over 5.5 percent for a 30 year mortgage. It was the most drastic weekly rate decrease in almost 30 years. 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. A lot of consumers are taking the opportunity to refinance their mortgages now. The last week in November showed a 200 percent increase in refinance applications from just the week before. Some consumers with ARMs are deciding to refinance to a fixed rate offering to give them some payment predictability. There are other consumers that refinance to lower their monthly mortgage bills. 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. Just as rates go down, rates can go up and you could miss a golden opportunity to refinance. Many financial experts think that if you are considering a refinance, it would be wise to take the current low rates. To determine if the refinance would be beneficial for you, you need to figure out if the costs and savings would be worth it for the time you plan to own the property. Figure out how much you would save on your monthly payments with the new interest rate. Next, determine how much the fees and costs of the refinancing will run you. The last step is to calculate when you would earn back any refinance expenses incurred, by dividing the costs by the savings. 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. Say, for instance, your break even date would be 18 months from the time of your 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 plan to refinance, consider taking the opportunity to do so under the current low rates before they go up again.

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