January 11, 2009

To refinance or not to refinance. That is the question.

Rates for 30 year fixed mortgages are hitting historic lows right now. A sample of some of the current rates (as of 1/8/09) offered:

US Bank quoted 4.875% with 0 points
4.750% at Wells Fargo's rate page but they don't show points. I dug deeper and requested a rate quote and got a result of 5.5% with 0.125 points
4.6% to 5.8% at Amerisave
My local credit union is quoting 5.0% with 0 fee, 4.675% with 1 point and 4.5% with 1.5 points.
Wamu quotes 5.0% but that had points, I checked for 0 points and its 5.125%

So thats a variety of sources for rates in the 4.6-5.5% range and a couple banks that have 4.875%-5.0% loans with no points. Keep in mind that rates are changing daily and will vary based on the exact situation so you should check current rates in your area.

With such great rates, is now the time to refinance? The short answer to whether or not you should refinance is always going to be : it depends.

First lets start with some basic questions to ask yourself:

1. Do you have equity in the home? If your home is under water, where the home is worth less than the mortgage, then you are unlikely to be able to refinance unless you can add equity out of pocket.

2. Do you plan on staying in the home? If you only expect to be in a home for a couple years then it rarely ever makes sense to refinance. I wouldn't consider refinancing unless you expect to be in a home for several years.

3. Can you get 1% or more off your rate? If you can lower your rates by at least 1% then it may make sense to refinance. But if you won't get 1% or more to refinance then it is probably not going to be worth it.

If you have some equity in the home, plan on staying and are paying 6% or more right now then it could make sense for you to refinance.

To get a solid answer on whether or not it would pay in the long run to refinance you should compare the specific numbers for your situation to figure out exactly how much you'll end up saving. It is easiest to do that yourself by using an online calculator to compare your current loan with new refinance terms. Try this refinance calculator from BankRate. Or this calculator at Dinkytown.

Remember when comparing loan rates that the amount of points, discount fees and closing costs have a big factor too. So keep all the expenses in mind when comparing loans and don't just look at the interest % rates. Also make sure to consider that if you refinance a loan that it will normally mean you'll be paying the loan for more years.

With today's great rates on mortgages it is possible for a lot of people to save a lot of money on interest. But before you rush into a refinance make sure to look at all the details of the loan and do a comparison to make sure it will pay off for you in the long run.

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