Mortgage interest rates have risen and fallen drastically during the last ten years. Current figures for 30-year, fixed-rate loans average 4.5 percent, down from roughly 4.95 percent in February of 2011. 15-year rates have fallen from 4.22 percent to 3.69 percent during the same period.
Variable or adjustable rates have dropped as well. June 2011 rates average 3.25 percent on 5/1 mortgages, down from 3.80 percent from February. Is it time to refinance your home mortgage?
Refinancing is paying off your mortgage and assuming another mortgage loan in its place, hopefully with lower interest rates. But interest rates are not the only figures to consider in this decision. You will also repeat many of the closing costs and other fees you experienced previously. Add those costs to your projection.
When you refinance, choose carefully between a 30-year mortgage and a 15-year loan. The minimum payment can be significantly higher in a 15-year mortgage. If you currently have a monthly payment of $1000, a 15-year loan may require a $1400 monthly installment. Is the difference in the fixed interest rate worth it? Is that higher installment amount affordable: Is it still within the approximately 25 percent of your income?
If you like the low adjustable mortgage rate, and that is your motivating factor, remember that rates go up. Consider the one-year, three-year and ten-year historical highs: The initial interest rate in February 2011 may have been higher than today's low rates, but ten years ago, the initial rate was roughly 7.5 percent. Extrapolating further back, in December of 1994, it rose to about 9.35 percent. Can you afford these worse-case-scenario increases?
Do you have enough in accessible savings accounts to easily cover any shortfall for an extended time period?
Fixed rate mortgages may charge a higher average interest rate, but when interest rates escalate, yours is guaranteed.
But refinancing isn't the only way to reduce your overall mortgage interest rates. Paying as little as $50 more than your minimum and applying that difference to the principal of your mortgage can reduce the amount of interest you owe on a loan. Depending on your interest rate, that $50 per month, principal payment can reduce the amount of interest you pay by roughly $1300 per year. Over the life of a 30-year mortgage, you might save as much as $25,000 in interest you didn't need to pay.
Watch the prepayment conditions and the finance costs. You may have to pay a down payment again, just as you did when you first bought the house.
Your home's value may have changed, but did it keep pace with others in your neighborhood? Do you need refinancing for the full value of your home and not just a portion of it? Every dollar you borrow adds to your debt burden. Don't mortgage more than needed.
Don't be shy about asking for information—detailed information—regarding refinance mortgages. Be sure to accumulate information on refinancing and not either first or second mortgages. Discard any irrelevant data; keeping information on other loan types may simply confuse matters.
If refinancing your mortgage is still more desirable after considering all these facets, ensure you get the best rate you can and the best terms available.
This post was contributed by John Walker from Payday-loans.co.uk. John lives and works in London, where he is in charge of monitoring financial trends for financial hedge funds.
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