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.