Is It Time to Refinance Your Mortgage?

by Miranda Marquit · 7 comments

Now might be just the right time to refinance your mortgage. Even if you already have a low interest rate mortgage, you could still benefit, thanks to the record-low rates that are present right now. Indeed, even someone with a 5% interest rate on a mortgage could save money, since rates on 30-year fixed mortgages are even lower.

Consider an adjustable rate mortgage, and you could end up with an even lower interest rate. With financial policymakers still trying to keep interest rates and Treasury yields low, there is a good chance that you will be able to take advantage of low rates for some time. However, since no one truly knows what’s coming, it helps to consider your options now.

Just remember: If you have costs associated with closing your refinance, you want to make sure that you will be in the home long enough for your interest savings to matter.

Fixed Rate Mortgage or an ARM?

When refinancing your mortgage, you will have to decide whether you want a fixed rate mortgage, or whether you want an ARM. Some might argue that an ARM is always a bad idea, but this is not so. In some cases, refinancing to an ARM can be smart — and save you money. If you can afford to pay a little more if interest rates rise, an ARM can give you big savings right now. It is also possible to apply for a hybrid ARM. You will have a low fixed rate for the first three to seven years, and then have a variable rate after that. As long as you pay down your loan principal, you should be able to refinance to a fixed rate before rates rise too much.

However, if you know that you might not be able to handle a higher interest rate later, or if you are concerned about an adjustable rate affecting your finances, a fixed rate mortgage with a known amortization schedule that lets you know exactly how much you will have to pay each month might be preferable.

Mortgage Term

Before you refinance, you will also need to decide on a mortgage term. While you can lower your monthly payment by refinancing to a longer term (for example, refinancing a loan with 18 years left for 30 years), you could end up paying more in the long run, and you will be in debt for longer. With mortgage rates as low as they are right now, it is quite possible that you could refinance to a shorter term and pay only a little more each month. It’s a way that can help you save thousands in interest, and be done with your mortgage that much sooner.

Qualifying for a Refinance

While lending standards have eased somewhat in the last couple of years, they still aren’t as loose as the standards seen prior to the 2008 financial crisis. Indeed, you will need good credit and sufficient equity in your home to qualify for a refinance. Some homeowners can get help from government programs like HARP, but many need to bring up their credit scores and reduce their mortgage debt before gaining approval.

If you want to refinance, it’s best to consider your options and plan ahead. It’s especially important to make sure your finances are in order, and your credit score is sufficient to allow you access to the best interest rates.

Now might be the time to refinance. You can’t earn a high yield on your cash, but you can take advantage of low borrowing costs. Refinancing is one way to do that.

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Looking to save on your mortgage? Here are some good rates...

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{ 7 comments… read them below or add one }

thefrugallery December 6, 2011 at 8:35 am

With rates so low the last few years, many people don’t realize that they might be able to beat their already-low rates. If you have good credit and you’ve maintained a good payment history, now might be the time to lock in!

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Kathryn C December 6, 2011 at 1:01 pm

I’ve refinanced 2 times in the last 2 years. Had to pony up some money the first time since home value went down a little, but the second time I refi’d it had gone back up. I cut about 2..75% over two years! Agreed, now is a good time…if you don’t get slammed on your appraisal of course.

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KC @ PsychoMoney December 6, 2011 at 7:38 pm

It is crazy how low the rates are. I dont think it is possible for them to go any lower, now is the time.

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JerrellStair February 1, 2012 at 4:16 am

Refinancing is the process of paying off an existing loan with the proceeds from a new loan, and using the same property as collateral. Because the interest rate on the new mortgage is less than the old, the loan costs less and you save money.

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sandu February 9, 2012 at 7:47 pm

Kathryn, the problem is not the appraisal or appraiser, is the mortgage, the lending institutions of the HUD_FHA. To re-fi a FHA now you’ll have to pay PMI in an amount that is close to 1.00% of the New Loan/ Principal which now will be greater, unless You will pay cash for All closing Expenses, over and over even if you lived there for more than 20 yrs. Every ADD says that you’ll save on the Appraisal Fee – no one tells you how much you’ll pay out of your pocket or add to principal. The appraisers ARE NOT paying Enough for their NEW appraisals- being Forced to work a lot more for a lot Less money. You will understand it: in 2004- 2006 an appraiser was charging 350-0650 for 1 – 4 family reports. Today: starts at $200.00 will extreme detailed reporting and supporting all in report: If yes say why is yes, if no provide support why is no, etc OK it makes sence on the reporting. But Where is my Feeee- of course I am an appraiser, semi-retired – but how about the New Young appraisers, could they live on such earnings, and remember today we all pay 2 times more for every utility bill/ gas/ etc so long and I pray for all.

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Marcelina Hardy August 14, 2012 at 7:39 pm

You know, when I bought our current home, I though rates were low. I can’t believe they are even lower now. I know I should refinance, but the hassle of it all can be a downer….Alright, thanks for your post. Might have to call the mortgage people tomorrow. :)

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Rosemary July 18, 2013 at 8:32 am

Even today, rates remain low. It is always a good idea to compare refinancing with a 30 year term and a 15 year term. If your current rate is higher, then the monthly payment may be the same if a 15 year loan is taken. This will save a lot of money on interest over the term of the loan. And 15 years can go by really fast.

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