The End of the Road for Cheap Refinancing?
For consumers considering refinancing their home mortgage, now may be the time to act. Predictions by the Mortgage Bankers Association indicate mortgage rates will increase in 2010 as economic indicators point to the era of cheap credit ending. And even a small change in interest rates can have a profound impact over the life of the loan. According to Christopher J. Mayer, a professor at Columbia Business School, “each increase of 1 percentage point in rates adds as much as 19 percent to the total cost of a home.”Particularly for homeowners who have been in their home for several years, now is a good time to reassess their total financial portfolio. Decisions that were made years ago are many times viewed differently in today’s very different economy.
Personal situations have changed as people have had income gains and losses, disruptions in employment, stock portfolios, retirement savings, and changing expectations. Personal circumstances have also evolved as divorce, marriage, college plans, empty nesters and retirement requires an evaluation of circumstances.
Making decisions on refinancing centers on a few core choices:
1. Refinancing your current 30 year mortgage and changing to a 15 year mortgage can yield the following benefits:
- Allow you to be debt free earlier.
- Lower interest payments over the life of the loan because principal is paid back more quickly.
- Lower interest rates – 15 year loans tend to be about ½ of 1 percentage point lower than 30 year loans
2. Refinancing your current 15 year mortgage extending repayment to 30 years can allow breathing room in the following ways:
- Introduces the “cash out” option, freeing up cash to pay for current monthly expenses
- Can help bridge the unemployment, underemployment gap that is a reality for many people in today’s tight job market.
- Allow for major household repair or renovation, again leveraging the “cash out” option.
- Consolidate monthly loan obligations into a single, lower interest, tax deductible loan/li>
3. Converting an adjustable rate mortgage (A.R.M.) to a fixed rate loan can provide peace of mind by:
- Ensuring more certainty for steady monthly payments
- Preventing resets to higher interest rates
- Possibly lowering monthly payment amounts
Questions to Ask
- How you answer these questions will help you determine the best solution for your current situation:
- What is the interest rate on your current loan?
- If you have an adjustable rate mortgage (A.R.M.) , when is the rate on your loan resetting? What will the new rate be?
- Will there be a prepayment penalty if you pay your loan off early?
- Can you get a better interest rate in today’s market?
- Has your credit history improved since you took out your last loan? Are you a better credit risk for lenders? If yes, you may be eligible for a lower interest rate.
- How much are upfront fees and closing costs? How long will you have to pay on the new loan to overcome these one time costs?
- How long will you stay in your current home? If you will not be in your current home for the next 3 to 5 years, it may be difficult to justify refinancing your current mortgage.
- What changes in your personal situation may positively or negatively impact your ability to refinance?
Most lenders can help you assess your current situation and make a decision that is right for your family. You are always advised to assess the information offered by lenders, and use your good judgment in deciding what is best for you, your family, and your current situation.
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