Saturday, December 20, 2008

When to Refinance

I've fielded several calls this week from friends and clients about refinancing; apparently when the Fed drops the interest rate to 0% people take notice!  The problem is that 30-year mortgage rates aren't tied very tightly to the Fed funds rate.  In fact, I've even seen mortgage rates rise when the Fed lowers rates.

So, to answer your question, is now a good time to refinance?  It depends.  Each person's scenario will be different, and you'll want to do your own analysis to see whether or not it makes sense for you.  Here are some things to consider as you crunch the numbers:

Reason for Refinancing.  Are you trying to lower your monthly payment, pay your loan off sooner (shorter term), or maybe even both?

Cost to Refinance.  Nothing's free, and if the mortgage guy tells you it's free he's probably charging you a higher interest rate to make up the difference.  And that might be ok - you might be able to save money without spending any money, just make sure to explore your options.  Either way, you'll want to consider the costs of refinancing, whether you pay them out of pocket or you roll them back into the loan balance.

Term of Loan.  Keep in mind that a new 30-year mortgage might lower your payment today, but add years to the end of the loan compared with what you have today.  In addition, the amortization schedule will start over, so your loan balance will decrease more slowly.  For example, if you've been in your house for 8 years and have 22 years left on your mortgage, you might want to explore a 15-year mortgage at a lower rate.  Another option is to get a new 30-year mortgage at a lower rate, but to continue making the same payments you've been making.  This will result in a quicker payoff.  On the other hand, if you get a new 30-year mortgage and pay the new mortgage payment, you will in effect take 38 years to pay off your home.

How Long will you stay in your home?  The longer you're going to stay put, the more important this decision will be.  You'll be more likely to recover your costs over a longer term, but you'll also run the risk of paying for the extended loan term if you start over with a new loan.

Stay Fixed.  Whether you look into a 30-year or a 15-year, please use a fixed rate, fully amortized loan.  You'll be happier later if you do this today!

Bottom line?  Rates are near historic lows and it's probably worth exploring a refinance.  But be careful to explore ALL the costs and how they will affect you, both in the short term (payments) and the long term (loan balance and number of years left).  And of course you're always welcome to give me a call/email if you want to bounce your numbers off me as well.

Your crunching numbers Realtor,

Chris Butterworth