Right Time to Refinance a Home?

While fixed mortgage interest rates have been holding relatively steady for the past year --averaging 6.38% APR, slightly down .38% from a year ago – some homeowners with higher adjustable rates are finding that now is a good time to refinance their mortgages. According to the Mortgage Bankers Association, nearly $1.1 to $1.5 trillion in Adjustable Rate Mortgages will face rate increases this year, with borrowers expected to refinance as much as $700 billion of these adjustable mortgages.

The costs savings to refinance a mortgage loan can be a considerable amount. For example, a monthly payment (excluding taxes and insurance) on a $250,000 mortgage loan at 7.50% would be about $1,748. Reduce this rate to 6.5% and the monthly payment becomes $1,580, or a savings of $168. However, as attractive as this savings might be, refinancing may not be the best option for everyone. Some homeowners with adjustable rate mortgages who would like to refinance into a new loan with lower interest rates are finding it harder to qualify.

With lenders tightening their lending standards, and the possibility of incurring pre-payment penalty fees for getting out of a mortgage early, not all borrowers can afford the thousands of dollars it would costs them to refinance their existing loans. These challenges are especially greatest for sub-prime borrowers, whose credit scores were below average to begin with and may have even declined further since taking out their initial loan, leaves them with little or no equity to negotiate with on a refinance.

As borrowers get caught up in an ever changing market, where home values are softening and inventory levels increasing, the Federal Reserve’s decision to hold interest rates steady has made fixed mortgage rates an attractive financing option for many borrowers.

Whether or not to refinance depends on each borrower’s unique set of circumstances and if the potential mortgage savings is enough to offset any existing refinancing penalties and fees. In which case, refinancing to a lower fixed rate may make the most sense.

Source: Informa Research Services

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