Gambling on Lower Rates to Refinance

The end of November, the average interest rate on a thirty year fixed rate mortgage was around 5.5 percent. It was the most drastic weekly rate decrease in almost 30 years. There are plans for the Treasury Department to lower rates to 4.5 percent for those purchasing homes, and may extend those rates to homeowners wishing to refinance. A lot of consumers are taking the opportunity to refinance their mortgages now. The last week in November showed a 200 percent increase in refinance applications from just the week before. Some consumers with ARMs are deciding to refinance to a fixed rate offering to give them some payment predictability. Others wish to refinance to simply get a better interest rate or terms to save money on their monthly payments. Unfortunately, lending standards have become much more restricted as a result of the credit crisis. That means that many who applied to refinance were not approved. To qualify for the lowest rates, consumers must now have excellent credit scores and must put in a bigger downpayment. Additionally, a growing number of homeowners no longer have enough equity in their homes to refinance, due to drops in home values.
The low interest rates will continue to entice consumers, particularly those looking to refinance. While many mortgage holders are grabbing the current round of low interest rates, others are waiting to see if the rates will drop further. Rates could just as quickly go back up, though, so you have to decide if you are willing to take the gamble. Most analysts advise consumers who are looking to refinance to take the bull by the horns and lock in the low rates. If you are wondering if a refinance makes sense for you, the simplest thing to do is calculate your savings and costs for the time you plan to hold the mortgage. Subtract the estimated new monthly payment from your current monthly payment to determine how much you would save each month under the new rate. Then, add up all the costs of the refinancing. The last step is to calculate when you would earn back any refinance expenses incurred, by dividing the costs by the savings. That total number of months is known as the "break even point." If you think you are going to sell the house before you reach that break even point, then you may not want to refinance. For example, it may take 15 months to recoup the costs of the refinance. If you expect to sell the house in a year, then the refinance may not be a good financial move.
It is hard to predict what will happen with mortgage interest rates. If you plan to refinance, consider taking the opportunity to do so under the current low rates before they go up again.