The old wisdom used to be that mortgage rates had to fall at least 2% in order for refinancing to make sense.  No more!  With mortgage lenders scrambling for your business with offers of low cost closings, the rules over the last few years have changed dramatically. 

The old wisdom used to be that mortgage rates had to fall at least 2%...

Now, it can actually make sense to refinance for an interest rate drop of less than 1% depending on the amount of the closing costs and how long you plan to stay in your home.  We have an excellent Mortgage Refinancing Calculator here at our website which can assist you in crunching the numbers under various scenarios.

If you plan to sell your current home within 3 or 4 years, you may be better off opting for an adjustable rate mortgage (ARM).  The interest rate of an ARM is generally lower in the early years than you would receive under a fixed rate loan.  

However, the interest rate gap between ARMs and fixed rate loans has narrowed considerably in recent years which can further cloud your decision if there is a slight possibility that you may not sell your home within a few years. 

Lenders are also offering hybrid ARMs now which have a fixed rate for several years before converting to a fully adjustable rate.  Since the early fixed rate is generally less than a standard fixed rate loan, the hybrid ARM is also an option to consider for individuals considering a move within a few years.

You should also be very careful when considering some of the no-closing cost loans.  They will generally come with a slightly higher interest rate than the typical mortgage.  In effect, you will simply be trading the normal up-front closing costs for a slightly higher interest payment during the term of the loan.  That may not be such a wise investment if you plan on staying in the home for many years to come.

If you already have your current mortgage payment built comfortably into your monthly budget, your best strategy may be to refinance your mortgage at a lower rate and use the savings to shorten the term of the loan.  As an example, if you currently have a 30 year $100,000 mortgage at 5.5%, you could refinance it at 4.5% and continue with your current payment which would shorten the payoff to 22 years.   

Finally, we want to point out that while many lenders are urging consumers to consolidate personal debts into their lower-rate tax deductible mortgage, this may not always be a wise alternative.  

True, you may be able to save on interest payments and obtain a tax deduction, but a home investment is typically the most important form of private investment the average citizen makes.   There are many caveats to consider in a decision like that and we urge you to contact us before venturing down a path with many pitfalls.