House and Home August 2011
Should You Refinance Now?
Photo: © Gemphotography | Dreamstime

With interest rates plummeting to historic lows, the thought of refinancing can be tempting, but is it the best option? There's no blanket answer that fits everyone. Each homeowner needs to assess his own situation to determine whether refinancing makes sense.

Interest Rates Are at Historic Lows
Current data shows 30 year fixed rates hovering around 4.5% and 15 year fixed rates at about 3.5%. These rates won't likely last long, and the unknown future of interest rates makes this opportunity seem too good to pass up. Depending on all the factors affecting your loan, refinancing right now may be a great choice. A lower rate could save tens of thousands of dollars. However, it might actually cost you more in the end. Consider all the math:

  • How long will it take to recover the monies spent on the refinance? The break even point could be 18 months to five years down the road. Will you be in your home long enough to recoup the fees? And, if you haven't yet recovered the fees from your initial closing costs, those would just get rolled over on top of additional settlement costs.

  • Does your current loan contain penalties for early refinancing? Many loans, including the popular sub-prime loans of recent years, invoke a penalty period extending three to five years into the loan. Ask your lender about any prepayment penalties for refinancing your loan.

  • Insurance premiums are going up. One company recently raised its rates 7.3%. Lenders require a home owner's policy before closing, demanding a year's worth of premiums paid in advance. That's a big chunk of change to add into the total tally of costs.

  • Are you more than halfway through paying off your current mortgage? If so, refinancing may not be worth the time and expense.

Alternatives to Refinancing
Lenders are far more strict today, demanding a credit score of at least 700, a substantial amount of equity and solid employment documentation. What can you do if you don't meet those requirements?

Pay more towards the principal of your existing mortgage each month, turning your 30 year mortgage into a 15 year mortgage. This requires discipline, but saves you loan fees and reduces the amount paid in interest. Make the payment in a separate check explicitly earmarked as a principal reduction payment. Depending on your monthly mortgage, term and outstanding balance, simply applying $400 per month on principal reduction could cut your total costs by half.

Do Your Homework
If you do opt to refinance, be sure to get a lock-in letter outlining the details before closing. And shop around: there are indeed some refinancing deals to be had with low fees.

William Brundage  -  (248) 980-2455 House and Home  -  August 2011 

William Brundage, Coldwell Banker Realty, 294 E Brown St , Birmingham MI 48009
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