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Grab the Low Rates and 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. There are plans for the Treasury Department to lower rates to 4.5 percent for those purchasing homes, and may extend those rates to homeowners wishing to refinance. Many homeowners are jumping on the bandwagon to refinance. The last week in November showed a 200 percent increase in refinance applications from just the week before. 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 are simply getting 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. Additionally, a growing number of homeowners no longer have enough equity in their homes to refinance, due to drops in home values.
The low interest rates will continue to entice consumers, particularly those looking to refinance. While many mortgage holders are grabbing the current round of low interest rates, others are waiting to see if the rates will drop further. Rates could just as quickly go back up, though, so you have to decide if you are willing to take the gamble. Many financial experts think that if you are considering a refinance, it would be wise to grab 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. Then, add up all the costs of the refinancing. 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. For example, it may take 15 months to recoup the costs of the refinance. If you plan on owning the house for 3 more years, then the refinance is beneficial.
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.