Refinance Your House During the Mortgage Crisis: It's Smarter than You Think

08/13/09

If you want to refinance your house, right now may be the time to do it. If you have good credit and a high interest rate on your mortgage, then the mortgage crisis has, ironically, created an opportunity for you. You can benefit exceptionally well from a refinance if you bought property during the past couple of decades, when interest rates periodically soared.

Because the Fed has repeatedly slashed federal rates over the past several rates, mortgage interest rates are the lowest they have been in years. Although Federal rates are not tied directly to mortgage rates, lenders tend to adjust mortgage rates to follow the same upward or downward trends.

When you consider whether a refinance is right for you, here are a few questions to take into account:

* Will the extra fees wipe out the money you would save with a lower interest rate? A refinance may bring with it a number of fees. If your interest rate is already fairly low, you may find that the money you save on interest payments is eaten up by closing charges.

* Similarly, will a longer loan term add enough extra interest payments to completely offset the savings you might have gotten through a lower interest refinance? Often, when people refinance because they want lower monthly payments, the bank offers them a mortgage loan with a lower interest rate as well as a longer term. The result is a temptingly low monthly payment. However, the extended term also allows more interest to accrue. A loan calculator can help you work out whether an offered loan really offers you savings. If the total comes out to more than the total of your previous loan, either pay more than the minimum each month to informally shorten the term of the loan, or do not refinance.

* Refinance with a fixed rate mortgage, not a variable rate mortgage. Variable rate mortgages generally offer lower monthly payments than fixed rate mortgages, but you are likely to lose the benefits of the low interest rate when the economy booms and Federal interest rates rise again.

* Do not waste time waiting for interest rates to drop even lower before you refinance! Interest rates are reaching record lows already. Anyone who waits too long to refinance is likely to be caught refinancing as rates rise again. If rates do start rising, do not wait even longer in the hope that they will drop again. Grab a relatively low rate while you can. Refinance and lock in a lower rate as soon as possible, getting an interest rate that saves you a good amount of money, rather than sitting on an expensive mortgage in the hopes that you will be able to save even more money.

Even economic crisis has its benefits. If you weigh your options carefully, you can take advantage of the current economic situation, and refinance your house at considerable savings to you.