Mortgage loan interest rates are again dropping to really appealing lows which may have you wondering if refinancing your home is a wise decision. The rule of thumb is that you should only refinance if you can lower your interest rate by at least two percentage points. As with all rules of thumb this is probably a good gauge to go by at a precursory glance but it doesn’t really give you the entire picture.
If you think that a home refinance may be a good option for you, you have to look at how long it will take you to break even on that refinance and how long you plan on staying in your home. Refinancing is not free, there are charges that are tacked on to your mortgage every time you refinance and you want to stay in your home long enough so that your lower interest rate not only saves you enough money to recoup those refinancing charges but then also begins to save you money.
Let’s look at it this way, if your new home mortgage rate saves you $100 a month and you’re being charged $2000 in mortgage refinancing fees, then during the first 20 months at the newer reduced mortgage rate you’d be saving $2000 or $100 a month for 20 months. Yet you’ve had $2000 added to your mortgage in refinancing fees so in this situation you’re not really seeing any savings until after 20 months. So if you plan on moving or selling your home before that 20 months has expired then you’re probably better off skipping the refinancing.
Before you jump at an advertised low mortgage rate, make sure you do your research and find out what the terms of the mortgage are. Quite often the advertised low percentage rate is for a shorter loan term, i.e. a 30 year loan versus a 15 year loan, the 15 year loan’s mortgage rate will be much lower and will probably be the advertised rate but will carry much higher monthly payments than the 30 year loan would.
Also there are fixed and variable rate mortgages. The fixed rate is set and never changes. The variable rate is set for a certain time and then can change. Oftentimes these variable rate mortgages entice people to refinance by offering very low rates initially and then jumping considerably in the future. If you’re only planning on staying in the home for a short time a variable rate mortgage may be a wise idea but if you’re planning on staying for a long period of time then you might want to stick to a fixed rate mortgage.
Most lenders will be very honest and upfront with you about refinancing, especially if they’re your current lender, but if it seems overwhelming you may want to contact an attorney who can give you an unbiased review of the situation and provide you with valuable guidance.