If Interest Rates Drop, Should You Refinance?
The Fannie Mae and Freddie Mac bailout by the government in early September led to a not surprising drop in interest rates. It is possible that the expected financial rescue package in progress will cause another drop. How will this drop impact the housing market and should it affect your mortgage borrowing choices? Historically, lower interest rates mean higher numbers of refinance loans. If you have a high interest rate mortgage and the credit to qualify, refinancing might be a smart choice at this point. Who will qualify for a home loan in this market and what should you expect of the borrowing process?
First, understand that sub-prime lending is largely a thing of the past. In order to qualify for a loan in this tight market, you will need good credit for a loan from your bank. You can find tips for improving your credit quickly, starting by assessing your credit report for accuracy. Keep in mind that interest rates are changing frequently now, even from week to week and that acting quickly may be critical if you want to take advantage of lower rates. If you have been late with your current mortgage, you might still qualify for a refinance loan thanks to FHA programs to prevent foreclosure.
Next, take a look at your current mortgage. If you have a fixed rate mortgage, the financial benefits of refinancing can be more minimal than you might expect. Take a look at a mortgage calculator to work out the possible benefits, ranging from lower monthly payments to a shorter or longer loan term. Mortgages.interest.com has a variety of helpful calculators to allow you to weigh the benefits of refinancing to a lower interest rates or different loan terms.
If you currently have an adjustable rate mortgage, refinancing in this volatile economy may be a smart decision, especially if your mortgage is due to adjust in the near future or has recently adjusted to a higher payment amount. A fixed rate mortgage provides greater stability. Homeowners struggling with costly ARMs may find that they have additional refinance options available, including FHA loans.
How much of a difference is necessary to make a refinance worthwhile? That is a personal decision. If you have good credit, no financial difficulties and can easily refinance, consider running the numbers through a calculator like loanshoppers.net/refi_calc.htm to determine how much you will actually save after all expenses are factored in. Keep in mind that even with a lower interest rate, if you extend the term of your loan you will substantially increase your total loan costs. Low interest and the shortest loan term possible will combine to give you the best long range cost outlook, but a longer loan term will allow for lower payments and more money in your pocket on a short term basis.