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Deciding When to Refinance Your Mortgage

Written by Nickel - 11 Comments

For those of you that haven’t been paying attention, mortgage rates are once again in very attractive territory. On top of that, the Federal Reserve just cut rates, and the Treasury Department is talking about driving 30 year fixed rates down into the 4.5% range in an attempt to stimulate the real estate market. With that as a backdrop, here are some thoughts about mortgage rates and refinancing…

The Federal Reserve and mortgage rates

First, it’s a common misconception that Federal Reserve interest rate changes drive the mortgage market. In fact, these rate cuts apply to short-term interest rates, and they typically have little to no direct effect on fixed-rate mortgages. That being said, adjustable rate mortgages (ARMs) may be more sensitive to these sorts of rate changes. In fact, depending on the terms of your loan, those of you with ARMs might see lower rates when the next time your loan resets.

The Treasury’s plan to drive down mortgage rates

Second, while it’s true that the Treasury is interested in driving 30 year fixed rates down into the 4.5% range, rumor has it that such loans will only be available to purchases, and not for individuals interested in refinancing. Of course, if fixed rates for purchases do go that low, refi rates are likely to follow at least partway.

Deciding when to refinance your mortgage

Of course, there are other considerations that go into deciding when to refinance your mortgage. For example, if you’re currently upside down on your home (i.e., you owe more than it’s worth) then you’re likely out of luck regardless of where rates go from here. But assuming that you’re in a position to actually refinance, I suggest that you run the numbers through a refinance calculator and your own analysis for yourself and see what makes sense.

I’ve previously written about deciding when to refinance your mortgage, and that information is applicable now as it was then. Your first step should be to head over to figure out your breakeven point and your total savings from refinancing. The former will tell you how long it will take to recover your closing costs — the sooner the better. The latter tells you how much interest you’ll save if you pull the trigger and refinance. With this info in hand, you’ll be able to make an informed decision. The second step is to compare specific offers you might be able to get from different mortgage lenders, including your current lender. You can request up to 4 free quotes from mortgage lenders competing for your business using the form below.

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Published on December 17th, 2008
Modified on July 12th, 2010 - 11 Comments
Filed under: Mortgages, Real Estate

About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!

11 Responses to “Deciding When to Refinance Your Mortgage”

1
Blaine Moore Says:
December 17th, 2008 at 4:44 pm
I’ve looked into refinancing a few times, but there just weren’t enough savings to justify it quite yet. If the rates do get down to the 4.5% range, though, then that would be spectacular! Taking a look at a 4.5% refi into a 15 year mortgage, our payment would only go up about $40 right now as is…

Sent an email off to my mortgage broker to see what his thoughts are. This might be something worth doing in the near future if the numbers keep moving that way…
2
nickel Says:
December 17th, 2008 at 4:47 pm
We actually refinanced earlier this year (February) and got into a 15 year fixed at 4.875%. That was down from a 30 year fixed at 6.375%, so we’re saving a ton of money in the long run.
3
Trevor Shipp Says:
December 17th, 2008 at 7:38 pm
From what I understand, a lot of how you decide whether or not to refinance is found in HOW LONG you’re going to stay in that home. Is it worth it to refinance and spend the money to do so if you’re only going to be there for the next year? Probably not…

That’s key. Decide what your long terms objectives are and then make a decision from there.

Though my family and I don’t have a home yet, we’re thinking a lot about this type of stuff. I’m going to learn now before I do something stupid!
4
Brian Says:
December 17th, 2008 at 10:10 pm
My wife and I were contacted by our mortgage guy who asked if we were interested in refinancing our loan. He said the rate would be 5.25% on a 30 year fixed when we are currently paying 6.75% on a 30 year fixed mortgage. It would result in monthly savings of about $150 and would take about 16-20 months to recoup. I see my wife and I staying in the house anywhere between two and five years. So although it would be a no-brainer if we were going to live here for 30 years, it is more questionable if we only stay 2-5 years.
5
Tony Says:
December 19th, 2008 at 12:04 am
In regards to Brians post:

You say that it would take 16-20 months to recoup costs, that’s $2400 at the minimum. Where do you live cause that seems high for being on the low end??? I’m in the Chicago area and when I last refied, it cost me $395 up front and $1200 at closing.
6
greenbuilder Says:
December 19th, 2008 at 2:04 am
I am currently working with a couple that is wanting to build a new house. We offered to buy their old house and start building now. They wouldn’t get much as much as they are asking but they can still rent it while they are building the new house. I am not one to push people into things that are not right. But I am looking at 6-8 months down the road and I could see interest rate going back up, after the goverment spends all of this money. They are going to have to raise rates to get people to save. So they question is do you think it is wise to take a loss on the existing house to move into their dream house? I think it is a tough call at this point.
7
Charity Wright Says:
December 22nd, 2008 at 10:17 am
I too am wondering if it would be in my best interest to refinance. I currently owe about $47,000 on my condo that has a current interest rate of 6.5%. I would consider refinance for 10 to 15 years.
8
Traci Says:
December 26th, 2008 at 1:18 am
We are upside down on our loan….my husband is unemployed and I am self employed in the service industry. Are there any plans out there for us to refi with no equity to a 30 fixed? Our rate now is 6.75 and I would like to take advantage of the low rate to lower our payment so we do not become a statistic.
9
Sandra Bezousek Says:
January 5th, 2009 at 12:22 pm
I have a 30 year morgage with a adjustable rate .The first 60 monthly payments have been at a interest rate of 5.650. Starting 12-21-09 this could change thereafter every year. Before each change date the note holder will calculate my new interest rate by adding 2 3/4 (2.75) to the current index. Not to exceed 11.650 or less then 5.650. I have approx 40,000 in equity and intend to stay here until they carry me out. Should I try to refinance at a fixed rate?
10
Brendan Says:
January 7th, 2009 at 2:41 pm
The government will not have to raise rates becuase of money they spent. Also mortgage rates have nothing to do with the rates the government sets. Those affect short term rates.

The government will only raise rates if inflation becomes a concern or if the economy heats up too quickly.
11
Tami Says:
February 12th, 2009 at 10:30 am
WE heard that in the stimulus bill has a clause that for people to refinance thier mortage to help us that the goverment will pay the closing cost, etc. to the bank. Is this true? WE have never missed a house payment but we are bareley making ends meet. I am disabled and my husband thank God still has a job, we did come into finacial difficulty after losing three of our parents and the finacial difficulty during that time we got behind severely on credit card payments (plus I had a lot of health problems that cost a lot of money and lose of job time for my husband) but we finally make agreements with each credit card ( because of a small inheritance I recieved from the passing of my parents) and paid them all off with them reducing the total due. WE have had such a hard time and the refincance will greatly help us but the closing cost we will have to come up with just isn’t available. So if this is true it will help us greatly. Please email me and let me know as soon as possible. Thank You
Tami Pace

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