Refinancing a mortgage is a topic of hot discussion these days as rates continue to hover around historic lows. With federal programs pushing for more lenders to participate in refinancing offers, many previously unqualified homeowners may not be able to secure a lower payment and reduce the risk of mortgage debt in the future.
Inside The Rate
Obviously, the most important aspect to refinancing a mortgage is the rate on the loan, but what constitutes a good refinancing rate?
During the sub-prime lending craze, many homeowners purchased homes under adjustable rate mortgages, leaving them with variable rates that increased over time. After the market crash, many homeowners were pushed out by foreclosures when their payments became too high. Research shows that about 95 percent of refinancing loans in the last two years have been from a variable to a fixed rate, a positive sign for borrowers. A fixed rate mortgage is generally the best option for a mortgage loan, even if the actual rate itself is higher than the initial rate on an adjusting rate. Why? Because the payment won’t increase over time and will remain steady.
Another thing to look for when refinancing a mortgage is a rate that is low enough to produce considerable savings. A good rule of thumb is that the rate on the refinanced loan should be at least 1 1/2 percent or more lower than the original rate. Depending on the financial situation of the borrower, the new loan should reduce the monthly payment by at least a few hundred dollars each month. Refinancing costs the borrower out of pocket expenses in the form of application, appraisal and closing costs. These fees can be up to 5% of the loan value, often thousands of dollars. If the interest rate isn’t low enough to outweigh the expense of paying thousands for a new loan, refinancing hasn’t really helped the borrower at all.