Mortgage Refinancing - Information and Advice

"When refinancing is the right choice for your mortgage loan."

Mortgage Refinancing: Making the Right Choices

Many people are considering refinancing their mortgages in order to reduce the cost of their loans. This article discusses when and how to refinance your mortgage. Click here for today's current rates for mortgage refinancing.

These days, long-term interest rates are quite attractive for mortgage refinancing. Even though the rates have come up from their historic lows, they are still comparatively low. For anyone with a higher mortgage rate, the market provides a golden opportunity for mortgage borrowers to refinance.

Deciding When to Refinance

The rule of thumb in the 1980s used to be that you should refinance when you can lower your mortgage rate by 2 percentage points.

However, I believe that today you should consider mortgage refinancing whenever rates have declined since you took out your mortgage.

There are two reasons why the old rule of thumb no longer applies:

1. The level of interest rates is lower than it was in the 1980s. Refinancing from 7 percent to 6 percent would give you the same proportionate reduction as refinancing from 14 percent to 12 percent.

2. The costs of originating a loan have fallen. A standard refinance calculator evaluates how long it will take you to recover the loan origination costs when you refinance. If you are charged little in points or origination fees, then it takes only the smallest reduction in interest rates to warrant refinancing.

Nowadays, any time you see an advertised rate on a mortgage that is lower than the rate on your current mortgage, you should investigate refinancing. It could be that rates have fallen since you obtained your mortgage. Or it could be that you did not shop as well as you might have when you got your current mortgage.

If you think that choosing the time to refinance should be based on whether interest rates are going down or up, I have good news and bad news.

The good news is that it is correct that knowing where interest rates are headed would help you make the correct refinance decision.

The bad news is that nobody knows for certain where interest rates are headed (and anyone who claims to know should not be trusted).

Choosing a Mortgage Refinancing Loan
In today's environment, I lean against adjustable-rate mortgages, or ARMs, that adjust in less than five years. The reason is that the maximum amount by which the rate can adjust typically still is 2 percent, even though rates have come down considerably since the products were first designed.

A 2 percent rate adjustment is proportionately higher now than it was a few years ago (see point 1 of the preceding section).

I do have friends who take out one-year ARMs and refinance them every year, always dodging the rate adjustment. They go for no-point loans to keep their refinancing costs down. This strategy has worked out well as rates have declined, but at some point rates will go up and these one-year ARM borrowers will have to pay the toll.

One question to ask yourself is whether you can afford the monthly payment on a 15-year fixed-rate mortgage. The monthly payment on a 15-year mortgage is higher than that on most other mortgages, because it is designed to be paid off in 15 years rather than 30 years.

However, if rates have fallen enough or your income has risen enough since you took out your current mortgage, the 15-year product may now be affordable for you. You can use our mortgage calculator to check.

If you cannot afford the monthly payment on a 15-year mortgage, then you need to consider different products. The 5-year balloon, 7-year balloon, and 10-1 ARM products all have merit.

The more likely it is that you will be moving in less than 10 years, the more you should lean toward the 5-year or 7-year balloon.

Should you pay points when you refinance?

For example, suppose that you can get an interest rate that is 0.5 percent lower by paying 1.5 points up front. Thus, the payback would be approximately three years: if you keep the mortgage longer than three years, it will be beneficial to have paid the up-front points.

The thinking is this:
Here I am, refinancing today. But what if rates fall again in the next few months? If I pay points now and end up refinancing again soon, then I've just thrown away money

What is happening here is that all of a sudden, because people are mortgage refinancing, their time horizons are very short. However, this may not be entirely rational.

Although it is possible you will want to recycle your mortgage again in three months, this is relatively atypical. There is a reasonable chance that you will keep your mortgage for at least three years.

If you can get a three-year payback or less by paying points, then paying points up front is an attractive option.

Click here for a rate quote for mortgage refinancing with no points or lender fees.

Mortgage Refinancing - Related Pages

Online Mortgage Lenders - Tips on evaluating online mortgage lenders and their loan offerings, rates and terms - Mortgage advice on refinancing or tapping home equity line of credit.

Refinancing Costs - Advice about mortgage refinancing costs and information about fees, points, closing costs and pre-payment penalties.

Refinance Tax Advice - Tax treatment and deductions for points paid to refinance mortgage - How and when points are deductible for mortgage refinance loans.

Mortgage Refinance Loan - Mortgage refinance loan information and tips on how to get the lowest home mortgage loan refinancing rate.

Refinance Home Loan Again - Information about refinancing your mortgage a second time - Tips on when it makes sense to refinance your home loan, no matter how new it is.

No Cost Mortgage Refinance - Information and tips about no cost home mortgage refinance loans and how to determine which home refinance loan is best for you.

Cash Out Mortgage Refinancing - Information on cash out mortgage refinancing - Resources for home loans, lowest mortgage rates and home equity line of credit borrowing tips.
 

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