Is now the best time to refinance your mortgage?

There are definite times when it makes sense to refinance your mortgage.  Now may or may not be the best time for you.  It’s extremely important to consider whether mortgage rates are rising or falling.  While the U.S. housing market is in the worst downturn since the Great Depression, economists are stating that economic recovery will be hindered until the housing market stabilizes.  Mortgage rates took a sharp drop in the past week, which provided much needed help for a housing industry that has seen a drop-off in buyers as borrowing costs have subsequently escalated.  The current average rate for a 30-year fixed mortgage rests at 5.38% for the week ending June 18.  This is a drop of 0.21% since the previous week according to data from Freddie Mac. 

Before refinancing, you need to consider how long you plan on living in your home.  If you currently have an adjustable rate mortgage (ARM,) this may adjust to a rate that is higher than a fixed-rate mortgage.   Now may be a good time to consider refinancing to a fixed-rate loan.  However, if you are only going to remain in your home for a few years, typically less than 7, it may make more sense not to refinance out of your ARM. 

If interest rates are currently changing in your favor, it may be time to refinance to a lower interest rate and lower your monthly mortgage payment.  A drop of just ½ to ¾ of a percentage point in interest can lower your payment significantly.  You can also change the term of your mortgage.  If you lengthen your term and spread the balance out over a longer period of time, your payment will be lower.  You can also refinance to an interest-only loan.  With this kind of loan, the minimum amount you are required to pay is the amount of interest for a certain period of time.  This way, you can also pay as much principal as you would like and also have the flexibility to pay less if you need to divert your money elsewhere, such as a 401K or tuition fund. 

The benefits of mortgage refinancing are easy to understand.  The lower the interest rate, the lower the monthly payment and total cost of buying a home.  However, before you rush into refinancing, there are some potential disadvantages to take into account.  First of all, refinancing costs money.  Sometimes, it can cost thousands of dollars.  Consequently, while lowering your monthly payment, it may take longer to break even and a refinance could end up costing you more. 

Ultimately, the decision to refinance is up to you based on your individual financial situation.  Make sure you carefully consider all pros and cons involved before signing any papers.  Keep an eye on the changing mortgage rates by searching online and by putting calls in to a local bank or financial advisor.