Last Updated: January 19, 2009
It's hasn't been like this in years. Interest rates on conforming 30-year, fixed rate mortgages dropped to an average of 5.01 percent for the week ending, January 8, 2009. And those record–low interest rates are prompting homeowners to refinance their mortgages at levels not seen in years.
"It's as if the entire nation woke up one morning and decided they all wanted to refinance at the same time," Bill Malkoun of Prosperity Mortgage said in published reports.
If you are among the masses who are contemplating refinancing your mortgage, consider these questions and suggestions from FPA member, Michael Snowdon, CFP®, of Snowdon Financial.
- How long do you plan to stay in your home? You need to say long enough to justify any fees and closing costs. That's probably four to five years, or more.
- What are the rates and other terms? Is the rate fixed or variable? What are the prepayment penalties, fees and costs, and points? In today's economic environment, a variable rate loan probably should be over–scrutinized.
- Will the refinancing allow you to move from a variable-rate or interest–only loan, to a fixed-rate
loan? If so, that would be a good thing. You can check whether you will save by refinancing by using the calculator at Bankrate.com.
- Can you afford the refinancing costs?
- Will you be forced to pay off your existing home equity line of credit (HELOC), and if so, does the refinancing still work?
- You need to check your credit rating and loan–to–value (the amount of equity still in home) to
determine the possible impact of refinancing. The loan–to–value ratio probably needs to be at least 10 to 20 percent, equity vs. loan amount. At the same time, it may make sense to check around. You never know what terms might be extended to you.
- Is the lender reputable and, to the degree possible to check, financially viable? The old maxim, "if it sounds too good to be true," is still a good warning.
- If someone is offering to find you a great refinance rate on a new mortgage for pre–payment of a "finder's fee" of some sort, run, do not walk, as far away as possible. With the finder's fee, the lender makes you pay the fee upfront with no guarantees.
- It's probably not a good idea to take out equity as part of the deal in the current environment. With housing values mostly dropping, maintaining as much equity in the home is probably smart. This gives you a cushion in case the worst happens — the economy truly tanks and credit tightens even more. That said, it might make sense to arrange for a HELOC to have in reserve just in case.
- If you can access home equity to pay off consumer debt, and in doing so improve your overall financial situation, it's worth considering.
To learn more, read "Thinking of Refinancing."