Mortgage Rates Fall: Should You Refinance?

After Feds cut interest rates to below 1% on December 16th, mortgage rates fell to the lowest point since 1976. Many homeowners rushed to refinance their mortgages effectively lowering their monthly payments by hundreds of dollars. Should a mortgage refinance be in your future?

The Cost of a Mortgage Refinance

The biggest thing standing between you and a new mortgage is the cost. Remember the fees you paid when you closed on your home, those are the same fees you’ll pay when you refinance your mortgage. So, refinancing your mortgage will cost thousands of dollars – 3% to 6% of your loan amount, according to National City Mortgage, headquartered in Miamisburg, Ohio.
Whether the cost outweighs the benefit depends on how much you save each month on your mortgage payments and how long you plan to stay in your house. For example, if you pay $2,500 in fees to refinance your mortgage and lower your monthly payment by $200, it will take you just more than a year to break even. It only makes sense to refinance your mortgage if you plan to stay in your home longer than the time to break even. If you’re in it for the long haul, refinancing your mortgage is definitely something you can consider.

Who Can Refinance Their Mortgage?

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While mortgage refinancing is perhaps just as attractive, it’s not as easy as it was during the height of the credit boom. First, refinancing options are far more limited with only 15-year and 30-year fixed-rate mortgages available. It makes sense though, since most homeowners want to refinance their way out of the unpredictable adjustable rate mortgages that played a major role in the current economic crisis.
Not only are there fewer choices of loans for refinancing, qualification is also more difficult. Borrowers need to have 10%-20% equity in their homes or a down payment of that amount.
As always credit history plays a major role in qualifying for a mortgage refinance. Borrowers should have good-to-excellent credit scores to get the best rates on a new loan. Subprime refinance loans are rare, perhaps even impossible.

Watch Out for Prepayment Penalties

If your current mortgage has a prepayment penalty, it could cost you more to get out of your current mortgage and into a new one. Work with your lender to negotiate an elimination of the penalty.