Should You Refinance Your Home?

Sep 11th, 2007 @ 11:54 AM by MortgageMentor

One question a lot of people are asking right now is whether to refinance their home. Even people who aren’t going to feel the mortgage crunch–at least not directly–are questioning whether the rates will change significantly. If you’re old enough to remember the early 80s, when interest rates were roughly double what they are now, you can understand why. I financed a property in 1986 to the tune of 11.5%, and if I’d waited 20 more hours I could have had the honor of a 12% loan.

The Mortgage Banker’s Association saw an increase in the mortgage refinance index, from 1770 to 1877, just last week. Experts are predicting that credit rules will tighten up, which may explain the increase. Another reason for many refinances is that the number of adjustable rate mortgages that are up for an interest rate rest is at a peak level.

If you have an ARM, you’ll be glad to know that the news is not all bad. Although the reset rate was high in July, Treasury yields have fallen–which should mean that your interest rate will actually be lower than before.

So. Should you refinance?

Weigh the Benefits

One of the biggest mistakes borrowers can make right now is jumping into a refinance package without weighing the benefits first. A refinance will only make sense if the overall savings offset the costs of getting into the mortgage in the first place.

Say you are carrying a fixed rate loan at 7 percent. You’ve found a different loan that will save you about $50 a month. But your closing costs for the refinance are about $3,000, and your child is graduating from high school in two years. You’re planning to move after graduation.

Dividing the $3000 by 50 dollars per month gives us 60 months, or five years. It will take five years to recoup the amount of money invested in the refinancing deal. Since you will move in two years, you would not be finished paying yourself back the costs yet. Refinancing for you is not the best option at this time.

Other Factors

Now, there may be other factors that come into play. For example, if you have an adjustable rate mortgage and you’re trying to get into a fixed rate package, the deal could be just what you’re looking for. Or maybe you’ve decided to swap out a 30-year mortgage for a 15-year one, or vice versa. You may have perfectly good reasons to refinance.

Exceptions for some ARM holders

Some ARM borrowers will not benefit from the treasury bill decline. For example, those who started at incredibly low rates will still go up, maybe as high as 3 percentage points. Check your contract to be sure. And some borrowers–perhaps many–won’t get a great deal at all. These are the borrowers whose rest is connected to the London interbank Offered Rate. This rate is actually up over the past 30 days, so if your loan is LIBOR based it might increase up to as high as 8.45 percent.

Conclusion

Whether to refinance is always something that needs to be weighed. The pros and cons should be balanced. But for loan resets that are based on treasury bills, the new rate for your ARM in the fall won’t be much higher than the average rate for a 30-year fixed mortgage. Breathe easy, and wait til you find a really great deal.