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Is it Time to Refinance Your Mortgage?

March 28, 2009 | Mortgage Loans | No Comments

Mortgage rates are falling and you may be wondering if it’s time to refinance.  On the other hand, you may be also asking yourself if it would be better to wait.  Unfortunately, there are no specific guidelines on how long you should wait, but you should only refinance whenever there is a financial advantage to do so.

A good rule-of-thumb is to refinance when mortgage interest rates fall at least one percentage point from when you first acquired your mortgage.  If you acquired a 30-year fixed rate mortgage for $150,000 at 5.5%, but rates are now 4.5%, refinancing at the lower rate will save you $91.65 on your monthly payments.

There are other reasons you may consider refinancing which include:

Switching to a fixed rate or an adjustable rate mortgage
– ARMs (Adjustable-rate mortgages) initially offer lower interest rates but can fluctuate up or down.  Switching to a fixed rate may give you peace of mind and lower your risk of your mortgage payments going too high. On the other hand, switching from a fixed interest rate to an ARM will reduce your monthly payments and is especially beneficial if you plan to sell your home in a few short years.

Improving the features of your ARM – Refinancing to a different ARM could reduce your monthly payments.  ARMs have protective caps, which limits how much your payments can increase in a given year and over the full term of the loan.  You may not be happy with the caps on your current ARM and switching to a different ARM may be more favorable.

Building your home equity faster – Switching from a 30 year mortgage to a 15 year mortgage will allow you to build up equity in your home faster; however, your monthly payments will be higher.  Additionally, over the life of the loan, you will pay significantly less in interest fees.

Reducing your monthly payments – Switching from a 15 year mortgage to a 30 year mortgage will lower your mortgage; however, you will end up paying more in interest fees over the life of the loan.

Turning home equity into cash – You may want to take some of the equity out of your home, which is called cash-out refinancing.  The advantage is that taking a loan secured by your home has a much lower interest rate than taking out an unsecured loan or credit card.  However, if the interest rate offered to refinance is higher than your current mortgage, then a home equity loan or line of credit may be a better a choice.

You will have to crunch the numbers when making your decision to refinance.  Keep in mind that if you do refinance, you most likely will incur application, appraisal and legal fees.  You may also pay for points to obtain a lower interest rate.  Typically 1 point equals 1% of a loan amount and will lower the interest rate by .25%.  Additionally, some lenders may charge you a fee for paying off your loan early, which is not allowed in some states.  Crunching the numbers will have to prove that your savings will be greater than the expenses you incur to refinance your home.

Above is a calculator to help you crunch the numbers and below are links to 2 other calculators you can use:


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