The rates on a 30 year home loan have recently fallen to record lows; and will possibly fall even further. Sometimes when homeowners hear about big drops in mortgage rates, they rush out to start the process to refinance their loan.
Even though the current rate may be lower than what you are paying on your mortgage right now, it may or may not make sense to refinance your loan. Before you make the decision to refinance your home loan, be sure it makes sense in your specific situation. Run the numbers and be sure you will save money by refinancing your loan.
Some reasons you should consider refinancing:
ARMS. If you are currently in an Adjustable Rate mortgage and your rate will be readjusting soon, you should probably look into refinancing into a fixed rate mortgage. Be sure you will stay in the home long enough to recoup the costs of refinancing. Once you refinance into a fixed rate loan, you no longer have to worry about increases in your interest rate. An increase in your interest rate by a few percentage points can make your monthly mortgage payment no longer affordable.
Monthly Savings. If you are able to lower your rate enough to save a few hundred dollars a month, it's probably a good idea to refinance. Saving an additional $100-200 a month could be a nice addition to your savings account or help you pay off your credit card debt a lot faster.
Low Cost. If you are one of those that pay your mortgage on time every month, your current mortgage lender will probably do what they can to keep you. This should probably be the first place to check when you make the decision to refinance. Most lenders already have a relationship with you so they can streamline the refinance process and save you money. Your current lender may be able to offer you a no-cost or low-cost refinance.
Cash Out. If you want to remodel your home, send a child to college, start a business, etc, you may want to consider refinancing to take cash out. You will probably need significant equity in your home since most lenders these days are scared they will end up holding the bag if you are not able to pay and the home goes into foreclosure. The more equity you have in the home makes it less likely that you will walk away without paying.
Once you've identified that it is a good idea to refinance your mortgage, make sure you have the credit and equity to back it up. Your credit and the amount of equity you have in the property will be an important factor in determining the rate you receive. Consumers with credit scores in the 700s and have more than 20% equity in their homes will have the best chance of getting the best rates.
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I've been thinking about refinancing to take advantage of the lower rates and lock in a 30-yr fixed (my ARM adjusts in 2011), but I need to do a break even analysis. I'm not sure how long I'll keep the house - by force (won't sell) or choice (wait until daughter graduates college). I need to call my lender to ask a few questions and gather some data. Thanks for the reminder.
Don't forget to ask about the reissue rate on your title insurance if you refinance. This can save you a substantial amount on your title insurance by using the verification work done when the original title insurance policy was written.