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How Do I Know if I Should Refinance?

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The end of November, the average interest rate on a thirty year fixed rate mortgage was around 5.5 percent. It was the biggest drop in a week since the 1970s. There are plans for the Treasury Department to lower rates to 4.5 percent for those purchasing homes, and may extend those rates to homeowners wishing to refinance. Many homeowners are jumping on the bandwagon to refinance. It was reported the week after Thanksgiving that applications to refinance mortgages were up 200 percent from the week prior. Many who have chosen to recently refinance are trading in an adjustable rate mortgage for the peace of mind of a fixed rate mortgage. Others wish to refinance to simply get a better interest rate or terms to save money on their monthly payments. The rates may be enticing, but banks have also tightened their lending practices. That means that many who applied to refinance were not approved. To qualify for the lowest rates, consumers must now have excellent credit scores and must put in a bigger downpayment. Additionally, a growing number of homeowners no longer have enough equity in their homes to refinance, due to drops in home values.

Homeowners wishing to refinance will undoubtedly be tempted by low mortgage rates. Some consumers are gambling that the rates will decrease even more. Just as rates go down, rates can go up and you could miss a golden opportunity to refinance. Most analysts advise consumers who are looking to refinance to take the bull by the horns and lock in the low rates. If you are wondering if a refinance makes sense for you, the simplest thing to do is calculate your savings and costs for the time you plan to hold the mortgage. Subtract the estimated new monthly payment from your current monthly payment to determine how much you would save each month under the new rate. Then, add up all the costs of the refinancing. Lastly, divide the total cost of the refinance by the monthly savings to figure out how many months it will take you to actually start saving on your monthly payments. This is called your break even date. If you plan to be in the house later than your break even date, it is probably worth trying to refinance. Say, for instance, your break even date would be 18 months from the time of your refinance. If you expect to sell the house in a year, then the refinance may not be a good financial move.

No one knows if the current low interest rates will stay steady, increase or decrease even further. If you plan to refinance, consider taking the opportunity to do so under the current low rates before they go up again.

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