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When are Refinance Rates Low Enough to Consider?

Refinancing your mortgage can provide numerous benefits, but only if you are able to get a refinance rates that is low enough. Recently rates have begun to drop as a result of the Federal Reserve purchasing mortgage-backed securities. Mortgage rates almost immediately began to fall and have remained quite low, historically low, in fact. Consequently, many homeowners around the country began to take advantage of the opportunity to refinance. It is expected that mortgage rates will begin to creep upwards following the end of this program by the Fed and could potentially reach an average of around 5.75% by the end of the year. If so, this will leave homeowners in the position of determining whether they should attempt to refinance while rates are still low.

If you are considering refinancing, there are a few elements that should be taken into consideration in order to determine whether now is the right time for you to refinance. One of the main factors to consider is the difference that exists between your interest rate and the interest rate at which you will be able to refinance. The traditional rule of thumb is for the difference between the two interest rates to be around 2 percentage points, but in some instances it may make more sense to go ahead and refinance if you can get a new interest rate with a difference of just one percentage point. Generally, the one percentage point rule should be considered if you are less concerned with actually paying off the mortgage and more concerned with lowering your monthly house payments, such as when you are nearing retirement.

While a low rate is important, it is certainly not the only factor that should be taken into consideration. You must also take into consideration how much money it is going to cost you to actually refinance your mortgage loan versus how much you are going to save each month by doing so. The general cost of refinancing tends to run between 2.5% and 3.5% of the value of your new loan. For instance, if you are refinancing a mortgage of $150,000, you can expect to pay around $4,500 in refinance fees. As a borrower you can opt to either roll those fees into the balance of your mortgage loan or you can pay the out of pocket.

If you think that you may sell your home within the next couple of years, you may discover that refinancing your home right not might not actually be that beneficial to you. In an instance like this it is possible that you could spend more money refinancing than you will be able to recoup through the savings on the monthly payments. Not sure which is the best option for you? Try taking the cost of the fees and then dividing that sum by the monthly savings that you will gain from the reduced interest rate. If you are going to pay $4,500 in refinance fees and save $125 per month in mortgage payments, you would need about 18 months before you would begin to actually realize any savings.

Keep in mind that even if you are able to make the numbers add up, you must still be able to qualify to refinance your mortgage, something that is not always possible for some homeowners, particularly as requirements have become more stringent. Loan underwriters are now looking much more closely at the overall financial picture of borrowers before approving refinance requests. Many banks now require a credit score of at least 620 to provide approval. In addition, you must also have a sufficient amount of equity in comparison to the value of the home in order to qualify for a refinance. If you owe more than 90% of the appraised value of the home refinancing could prove to be difficult; a situation than many homeowners around the country have found themselves in as property values fall and continue to decline as a result of the housing crisis and increasing foreclosures.

Refinancing does offer the opportunity to save money in interest on your mortgage and possibly even pay off your mortgage faster, but only if you are able to get the numbers to add up and can meet the stricter underwriting guidelines that now apply. Taking the time to assess your own personal situation before diving into a refinance application will help you to determine whether now is the right time for you to consider refinancing your mortgage loan.



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