Should You Refinance Your Mortgage Now?

[Jan 27, 2010.]

 

Fewer homeowners tried to refinance last week, contributing to a drop in demand for home mortgages. The Mortgage Bankers Association (MBA) Market Composite Index, which measures mortgage loan application volume, fell 10.9% from a week earlier on a seasonally adjusted basis.

"Although rates remain low, there appears to be a smaller pool of borrowers who are willing and able to refinance at today’s rates,” Michael Fratantoni, MBA’s vice president of research and economics, said in a statement.

Mortgage Refinancing Q&A

Mortgage rates are expected to begin rising this year, but there's still time to refinance at some of the lowest mortgage rates ever. Anyone considering mortgage refinancing should consider the following things to help them decide:

—Will mortgage refinancing reduce the monthly payment? In the good old days before the housing market tanked, the rule of thumb about refinancing was usually not to do it if borrowers couldn't shave at least 2 percentage points off their mortgage rates. Those rules have changed and many homeowners are choosing to refinance even if they only see a 1 percentage point drop in their mortgage rates.

—How many months until the borrower recoups the closing costs? Homeowners can run the numbers with a mortgage calculator to see how long it would take to break even on the closing costs involved with refinancing. If a borrower plans to stay in their house for at least that amount of time, refinancing could pay off.

—Can the borrower drop their mortgage insurance (MI) by refinancing? Although a lot of homeowners are underwater on their mortgages, not everyone has negative home equity. Some people who are currently paying mortgage insurance because they made a down payment of less than 20% on their mortgage loan may be able to get rid of this cost by refinancing. The cost of private MI (PMI) varies depending upon the down payment and loan amount, but runs about $50 to $80 a month for a median priced home valued at $198,600, according to the Mortgage Insurance Companies of America. 

—Has the borrower shopped around for mortgage quotes from several lenders? It's important to compare deals being offered by mortgage lenders since not all loan packages are the same. Borrowers should look at the terms of the mortgage loan being offered, as well as how the mortgage broker gets paid.

Shorter Term, Larger Payments

Some people may be uncomfortable with the idea of restarting the clock on a 30-year mortgage because much of the payment in the early years only goes toward interest and not principal. If this is a concern, borrowers who want to refinance can always consider refinancing into 15-year mortgage loan, but their monthly payments would likely increase.

 

About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.