The Federal Reserve Board has kept rates low for the past few years. Many have already made application with lenders to refinance their present mortgages. Others are waiting. The question we ask in this special report is–when should you act?
Many wait too long to refinance. For example, often mortgages go into foreclosure because the homeowners could not afford their mortgage payments. However, if they had acted earlier to refinance, they might have avoided losing their home. The process becomes much harder when you fall behind on your mortgage payment.
Therefore, the first rule is to investigate refinancing as soon as your payment becomes a burden or the potential benefits outweigh the costs. There are many benefits to refinancing. You can obtain a lower payment by lowering your rate or by consolidating your other higher interest rate and/or non-tax deductible debts into the mortgage if you have the equity in your home. Or you may receive both benefits. The inset box in the center of this report illustrates both benefits using fictitious numbers. The one disadvantage of consolidating consumer debt is spreading out this debt over a long-term. However, the homeowner can use his/her monthly savings to prepay their mortgage and receive an additional benefit over their mortgage term-the savings of tens of thousands of dollars in interest!
The next question is–when should I act based upon today’s rates? Could rates go lower? There is no doubt that rates could go lower. They could also go higher. Never try to predict the future. Make your decision about whether to refinance based upon the benefits you might receive now–not based upon what may happen in the future. If you purchase a stock for $4 per share and it goes to $10 per share, do you sell it now or wait for it to go up further? You can wait, but there is a risk with waiting.
Is your mortgage an adjustable that has already gone up or is scheduled to change in the next 12 months? Lower rates may translate into less of an adjustment on your mortgage; however you cannot predict the future of interest rates. If you are presently in a 3/1 adjustable that is scheduled to change in six months and you can move into a low fixed rate or another adjustable right now, why take a chance? Let’s say your present mortgage is at 4.5% and based upon today’s rates, the mortgage would adjust to 5.0%. If you can get a fixed rate for 4.5% or another 3/1 adjustable at 4.00%*, you may well want to act now instead of waiting. Once again, rates could come down, but there is a risk of rates going up as well. Ah, if we could only predict the future!
|$2,000 Mortgage Payment|
|$200,000 Mortgage Balance|
|$1,500 Monthly Debt Payment|
|$40,000 Debt Balance|
|$245,000 New Mortgage Balance|
|$2,200 New Mortgage Payment|
|$1,300 Monthly Savings|
*Note that these hypothetical rates and numbers are presented for illustrative purposes only.
Are you thinking about the future? People do not just refinance to lower their payments or move out of adjustable rate mortgages. Lower rates can be the best opportunity to think about your future. What if you can move from a 30-year fixed mortgage to a 20-year fixed or even a 15-year fixed without changing your mortgage payment? What would it mean to your financial future to have your mortgage paid off in 15 or 20 years? With homes not appreciating rapidly, buiding up equity through pre-payment could be an important financial strategy.
Paying off your mortgage in 15 years does not mean that you have to keep the equity in the home. You may decide to invest that equity in several ways, for example, funding your retirement plan (also a great tax deduction), starting a business or even purchasing a second home or investment property. Having options like these is a great position to be in.
Is it time to refinance? We can’t say for sure. But it is certainly time to consider your options and speak to your mortgage loan representative. Those who wait may miss the boat.