Mortgage rates hit a 38-year low last week, and a Freddie Mac survey said 30-year fixed mortgage rates dropped to an average of 4.71 percent the previous week.
The rates have plenty of people wondering whether they should refinance their loans. It could be an especially good time for homeowners with variable rate loans to lock in at a low rate.
In deciding to refinance, experts say the first question to consider is whether you have enough equity in your home. If you bought it during the housing bubble, you owe as much as your house is worth.
You should weigh a few other questions. One is the cost of applying for a new loan. Another is how long it would take to offset the costs of a loan application with the savings realized from a lower interest rate. In addition to loan application fees, you will also have to calculate the cost of a title, recording fees and, depending on how much you owe, mortgage insurance.
You should also calculate how long you figure you will stay in this house. Will it be long enough to make the refinancing worthwhile? As a general rule, if you are not planning to keep the house for at least three years, you won’t save enough to make refinancing a good idea. But it may also be true that the temporary cash flow break could make it worthwhile.
- What is behind the lower rates? (MarketWatch)
- Three steps to refinance your mortgage (Bankrate.com)
- Why now may be a good time to consider refinancing a mortgage (The New York Times)
The Times pointed out that even if you owe more than your house is worth, you might have a shot at refinancing:
“…there is also a limited-time government program that helps people to refinance if they are slightly underwater. The ‘Home Affordable Refinance Program’ is not as widely discussed as the related loan modification program. And it has been criticized by some housing experts for helping financial players profit. Still, it aims to help homeowners who have a mortgage balance equal to or greater than the value of their home refinance and obtain more affordable monthly mortgage payments.
“The program is available until June of next year to homeowners who meet certain qualifications, including having loans owned or guaranteed by Fannie Mae or Freddie Mac and having a first mortgage that does not exceed 125 percent of the current market value of the home. (See if you qualify and find out how to apply if you do.)”