Should You Refinance When Rates Are Low?
Fixed Rate Mortgages
The reduction in interest rates by the Federal Reserve doesn't necessarily result in drastically lower rates for fixed-rate mortgages. This is because bond rates, not the fed rate, drive fixed mortgage rates.
You've probably heard that it only makes sense to refinance your mortgage if the new interest rate is at least two percentage points lower than your current rate. Forget this piece of advice. It worked in the days when you could only get a 30-year fixed rate mortgage. It doesn't apply in today's financial markets where there are many options for financing your home, including fixed mortgages with terms of 15, 20, or 30 years; five- and seven-year balloon loans; and a wide variety of Adjustable Rate Mortgages (ARMs).
Even if you can't lower your monthly payment by refinancing, it might make sense if you can give up the insecurity of an ARM for a fixed rate. Marshall Loeb of CBSMarketWatch.com offers guidelines for helping you decide whether to refinance, in his book "52 Weeks to Financial Fitness." You can read his chapter on Mortgages at CBSMarketWatch.com.
Adjustable Rate Mortgages (ARMs)
Adjustable mortgage rates are affected more by changes in the fed rate because these types of loans follow short-term interest rates, such as Treasury bill rates, which follow the fed rate.
When does an ARM make sense? If you're planning to stay in a home for only a few years and you can get an ARM for significantly less than a fixed rate mortgage, you may come out ahead by going for the ARM. Adjustable rate mortgages are also popular with people who may have difficulty qualifying for a loan at higher fixed interest rates. The lower ARM rate lowers their monthly payment, making it easier for them to qualify for the loan.
If, on the other hand, you already have an ARM and you plan to stay in your house for the long-term, consider locking in at today's attractive fixed mortgage rates.
Home Equity Loans
Home equity loan rates follow the prime rate, so they are directly affected by the Fed's interest rate increases and decreases, although they are always higher than regular mortgage rates.
When interest rates are low, it's an excellent time to take out a home equity loan (but not necessarily a home equity line of credit, which works differently, and only if you use it wisely).
Making the Decision to Refinance
If you decide to refinance, first contact your current lender to see if you can negotiate with them to waive some of the closing costs. If this doesn't work, you can call local lenders for rate information, but the best way to search for and compare mortgages is to do so online at one of the many web sites that offer this service, such as e-loan, quickenloans.com, or bankrate.com, to name just a few. Many online brokerages will also allow you to apply for the loan online.
If rates are low and you're in the market for a lower mortgage rate, don't hesitate to investigate whether you can save money by refinancing.