Should you Refinance your Mortgage


According to MSNBC, mortgage lending rates hit their lowest point since March of 2004 last week. For many people, now is the time to start shopping around to refinance your home.

Expiring Fixed-ARMs

If you purchased a home in the last few years, it is possible that you have a “fixed-ARM” loan. A fixed-ARM loan typically has a short-term (1,2,3, or 5yr) fixed-rate that is very low, but that will convert to an adjustable rate when that term expires. Maybe your loan has already changed to an adjustable rate.

In an adjustable rate mortgage, the amount of your monthly payment adjusts in response to changes made to lending rates set at the federal level. Federal lending rates fluctuate based on global economic shifts that are difficult to predict. As a result, people who have come to or are nearing the end of their low fixed-rate term should be watching interest rates, and be preparing to lock the rate in near its lowest point.

As earlier stated, it is difficult to predict when the interest rates will hit a low point, but many people think that mortgage rates will continue to drop or at least stay low for the next six months to a year. If you have an adjustable rate mortgage, you should start talking to lenders, and keeping your eye on the economic news. It is likely that in the next few months mortgage rates will be low enough to where you will be able to lock in a permanent rate close to what you are paying now. That is a golden opportunity. Even if your payment will go up slightly right away, that is better than waiting for the fixed-rate to expire leaving you vulnerable to an increase in interest rates that will come eventually.

Increased Income/Lowered Expenses

Sometimes the option to refinance isn’t necessarily about lowering your monthly payment. It is better to have a traditional fixed-rate, amortized loan with a higher monthly payment, than it is to be paying interest only with a lower payment. Typically, the more you can pay, the more quickly you can pay off the debt in your house and build equity.

If you experience an increased income, or reduced expenses (like paying off a car or student loan) you can accelerate the equity building process by refinancing to a shorter term loan, 15 years, instead of 30. This allows you to spend less of your payment on interest-which is money paid to the bank-and more of your money to yourself in the form of equity in your house. If you can afford a slightly higher monthly payment, but pay off the debt in your house more quickly, you should consider refinancing to a shorter term. Now is a great time to do this because you will also have the advantage of having a very low interest rate.

Equity Milestones

It is likely that you may have refinanced four years ago when interest rates were at the same level that they are now or at least close. It may not be worth the trouble and expense for your to refinance just to save a tenth of a percent on interest. However, it may still be worth talking to the bank if you think that your equity in the house has gone up since then.

If you have a typical amortized mortgage you are paying a part of the principal of the loan off each time you make a payment. As the principal is paid off, your equity in the house goes up, debt goes down. As a homeowner you should be keeping track of your progress towards paying off the debt on your house. Lenders usually give breaks at every 5% of equity that you pass. Most lending institutions will give preferential interest rates on mortgage loans that represent a smaller percentage of the house value. For instance, if a house is worth $500,000, and the amount owed is only $200,000 (40%), the lending rate will be much better than in the instance where the amount owed is $400,000 (80%).

Sometimes equity can accumulate quickly as a result of house value increasing, or if somebody uses a bonus, inheritance, or some other asset to “buy-down” the debt in their house. If any of these events have occurred recently, you should consult your banker about refinancing possibilities. Once again, it is probably wise to start following the economic news, to try to refinance when the rates are at their low point.