Photo by woodleywonderworksThe housing market is getting restless again. That’s a good sign! When the market was totally unwell, it was still and quiet, just like a person with the flu. But now there are signs of activity. Think of your spouse venturing out of bed and even being a little grumpy-it’s a sign that he or she feels better, right? The same applies to the housing market. But is it a good time to refinance?
Well, things aren’t entirely back to normal yet. There’s still a chance the patient could have a relapse. So let’s look at some indicators to help you make a decision.
One of the most deeply inscribed rules of refinancing is that you should not even bother doing it unless you will lower your interest rate by two percent. If you’re at 9% interest and you think you can get down to 7%, then by all means the savings will pay for the cost of the refinancing process.
But where are interest rates right now? They are sitting around 5%–give or take-but that’s for people with a FICO score of 700 or better. You won’t get a better deal than that if your score is lower. So if you bought your home five years ago in 2003 when mortgage interest rates were low, low, low, you’re probably not going to benefit from refinancing.
Maybe you bought your home five years ago but you didn’t get the lower interest rate because your credit was bad. If you’ve cleaned up your credit score since then, you might very well benefit from refinancing.
Maybe your original mortgage was an adjustable rate mortgage. You’d be making a smart move to get out of it by refinancing for a fixed-rate loan. And, incidentally, that brings up a caveat for today’s refinancers, because some of them are not paying attention to the fine print on the mortgage terms issued in this recovering market. They’re not even aware that they are succumbing to the lure of teaser rates, and that higher interest rates loom in their future.
Another consideration could be the length of your loan and the amount of your mortgage payments. What if you originally took a 15-year mortgage with the associated higher monthly payments? Someone hit hard by the economy who’s just looking for a way to lower his overall monthly payouts might refinance to a 30-year mortgage just to get a lower mortgage payment.
How long will you stay in your home? If you calculate that your refinancing will cost $2,000 and save you $200 per month, then you must stay in your home at least ten months just to break even. If even the possibility of a move looms in your horizon, then don’t refinance.
Ultimately, you need to visit your local bank. Hopefully, you’ve established your custom with the neighborhood bank manager, and he will give you an honest assessment of what rate his bank will offer to someone with your credit rating at this point in time. It doesn’t hurt to look into it, but move carefully. And take an aspirin.
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