Interest rates for mortgages dropped recently to an average of just over 5.5 percent for a 30 year mortgage. It was the most drastic weekly rate decrease in almost 30 years. There are plans for the Treasury Department to lower rates to 4.5 percent for those purchasing homes, and may extend those rates to homeowners wishing to refinance. A lot of consumers are taking the opportunity to refinance their mortgages now. The last week in November showed a 200 percent increase in refinance applications from just the week before. Many who have chosen to recently refinance are trading in an adjustable rate mortgage for the peace of mind of a fixed rate mortgage. Others wish to refinance to simply get a better interest rate or terms to save money on their monthly payments. The rates may be enticing, but banks have also tightened their lending practices. As a result, a lot of consumers who submitted applications to refinance were denied. To qualify for the lowest rates, consumers must now have excellent credit scores and must put in a bigger downpayment. Additionally, a growing number of homeowners no longer have enough equity in their homes to refinance, due to drops in home values.
The low interest rates will continue to entice consumers, particularly those looking to refinance. Some consumers are gambling that the rates will decrease even more. Just as rates go down, rates can go up and you could miss a golden opportunity to refinance. Many financial experts think that if you are considering a refinance, it would be wise to take the current low rates. To determine if the refinance would be beneficial for you, you need to figure out if the costs and savings would be worth it for the time you plan to own the property. Figure out how much you would save on your monthly payments with the new interest rate. Then, add up all the costs of the refinancing. Lastly, divide the total cost of the refinance by the monthly savings to figure out how many months it will take you to actually start saving on your monthly payments. This is called your break even date. If you plan to be in the house later than your break even date, it is probably worth trying to refinance. For example, it may take 15 months to recoup the costs of the refinance. If you expect to sell the house in a year, then the refinance may not be a good financial move.
It is hard to predict what will happen with mortgage interest rates. If you plan to refinance, consider taking the opportunity to do so under the current low rates before they go up again.