Has it come time to refinance? Mortgage interest rates have dropped so low in May 2009 that you may be tempted to refinance. But is it the right time for you?
The first sign that it is a good time to refinance mortgage loans is that the average interest rate is two or more points below the interest rate on your existing mortgage. This is a significant enough sum that most people will recoup more in savings than they will pay in refinancing fees. However, do not jump to the assumption that your situation fits the formula. If you do not stay in the house long enough for the savings from the lower interest to equal the refinancing fees you paid, you will actually lose money from the refinance.
Lowering your monthly payment is another reason to refinance mortgage loans. If you are strapped for cash, being able to put less of your earnings into your mortgage can significantly ease your budget. You can lower your mortgage payments by refinancing to a mortgage with a longer term, which means a higher total bill but a smaller monthly bill. Or, if you plan not to own your house for much longer, you can drop your monthly bills even lower by taking out a non amortizing loan. If you refinance mortgage loans via a loan that does not amortize, you pay only the accrued interest for a grace period of several years. At the end of the grace period, you must repay the capital at an accelerated pace, or may even need to pay it all off at once. However, if you sell or refinance the house before the end of the grace period, you get the benefit of lower monthly payments, and repay the balance of the loan with the proceeds from selling or refinancing the house.
If your analysis of your financial situation tells you that right now is a good time to refinance, mortgage interest rates as of May 2009 are ideal. On the other hand, your personal situation may not make refinancing a sound choice right now. Wait to refinance; mortgage interest rates will fall again. Either way, your own financial situation is the best and only guide to when its time to refinance.