Low Mortgage Interest Rates Spur Home Refinancing

Although it is still difficult to get a mortgage in today’s market, mortgage interest rates are at an all-time low. The result of low interest rate mortgage loans is that home refinancing now makes up the majority of activity in the mortgage markets.
Since demand for new homes has dropped due to the recession, current homeowners, seeing mortgage interest rates hit rock bottom, have tried to refinance their homes to reduce monthly payments or shorten loan terms.
A homeowner could save thousands in mortgage payments yearly by refinancing. However, even if lowering monthly payments is your goal, be aware that refinancing does not help build home equity. Refinancing also has costs associated with it, such as appraisals, or penalties for refinancing too early on your original mortgage.

Refinancing factors to consider

How do you know if refinancing your home is right for you? Here are four factors to consider.

Credit score. For virtually any mortgage program, you must have a minimum credit score of 620. The same is true for refinancing.
Income. If your household income has been reduced due to unemployment, refinancing may be difficult. If you can show unemployment checks stubs, which count as income, you may have better luck.
Costs involved in refinancing. Usually, borrowers will pay around 2% of the new loan amount in fees and costs, including loan application, appraisal and home inspection. There may also be a fee for a new escrow account, which the lender sets up to hold home insurance and property tax payments. If you use the same lender as your original mortgage, you could avoid this escrow fee. Another fee to be aware of is a prepayment penalty clause. Look in your old mortgage paperwork for this clause. You could be penalized from 1% to 3% of the balance of your mortgage if you refinance in the first few years of your loan.
Adjustable-rate mortgages. If you have an adjustable-rate mortgage that will reset within a year, you will want to decide whether or not to refinance to a fixed-rate mortgage. If you financed your home with an adjustable-rate mortgage five years ago at 5.44%, for example, it would adjust at today’s rates to around 3%, and will continue to adjust annually based on mortgage interest rates. If you refinanced into a 30-year fixed mortgage, you would then have a rate of about 4.5%. So, although no one can foresee what interest rates will do in the future, locking into a fixed-rate mortgage now will negate the interest benefits the adjustable-rate mortgage offers today.