Near the end of 2008, the government bought a large portion of mortgage backed securities totaling $500 billion. Consequently, mortgage loans have been offered at lower and lower rates. Rates for mortgage loans are at the lowest point since Freddie Mac began following the trends in rates 28 years ago. Falling rates are a pleasant surprise in the struggling economy, especially for potential home buyers that were shut out by inflated values during the real estate boom. Many of those consumers have decided to take advantage of the low rates for mortgage loans to purchase a home. Others are taking advantage of the low rates to refinance their current mortgage loans. Although the interest rates are enticing, lending institutions now have much tighter lending standards. Unfortunately, fewer people are eligible for the lowest rates due to higher credit score and down payment requirements. Those particularly affected are homeowners whose home values have decreased significantly since they purchased their properties. They now have less equity and may not qualify for refinancing for that reason. Calculating the costs and benefits of refinancing mortgage loans, as well as examining credit files, credit scores and current equity should be part of any decision to refinance.
If you wish to refinance, shop around online to determine the interest rates and types of mortgage loans for which you might be eligible. Next, do the math to determine if a refinance is the right thing for your financial plan and budget. The most common reason for refinancing is to bring down the payments on mortgage loans. Calculate what the monthly savings would be for you by subtracting the estimated monthly payment under the new rate from your current payment. Then add up all the costs of the refinancing. Just like when you obtained your original mortgage, you will have bank fees, documentation and title costs, attorney fees and appraisal costs. The next step is to figure out your "break even point," or when you will actually start saving each month. To calculate this, divide all the costs incurred by the refinance by what you expect to save each month under the new interest rate. This will give you a rough idea of when you will start saving. If you expect to sell the house before you break even, refinancing might not be the best financial move. If you plan to own the house past that break even point, then consider refinancing. If your savings outweighs the costs over the time you expect to own the house, then refinancing now via the low rate mortgage loans could be a smart move.
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