Home Mortgage Refinancing Strategies: Refinancing When Interest Rates Drop

An Overview -- Home Mortgage Refinancing Strategies Today

Most experts in the financial industry will tell you that you should refinance when you can save two percentage points on your interest rate, and still others say you should always keep refinancing in mind. While that’s a good rule of thumb in general, there may be other considerations that make that rule obsolete.

Understanding Interest Rates and Home Mortgage Refinancing

Keep in mind first that unless you are in the home mortgage refinancing business, you don’t watch these rates carefully. Because of this, it can be difficult to know when the best time to refinance will be. Also, due to the lengthy loan approval process, you need to think ahead for a maximum payoff on your refinance.

Consider Home Mortgage Refinancing When Your Ability to Pay has Changed

So instead of indiscriminately deciding that you will refinance if the rates drop a certain percentage, also consider refinancing if your ability to pay has changed. For instance, if you have had a recent windfall or a large wage increase, consider refinancing not only when interest rates drop, but to a shorter term as well. You can save thousands of dollars in your first few years just going from a 30-year loan to a 25-year loan. While many people choose instead to simply pay down principal on long term loans, this does not change the amount of principal on which the interest is calculated unless it’s an ARM, and then it’s only annually.

Home Mortgage Refinancing and High Home Equity

If you have built up a lot of equity in your home, refinancing could be a bad deal for you even if interest rates are lower. Remember that when you start payments on a loan, you are paying mostly interest. When you refinance, this process begins again. So if you are refinancing a smaller loan amount, you may not get the maximum benefits out of the lower interest rates unless they drop is truly significant.

Fees and Costs of Home Mortgage Refinancing

Often mortgage holders who are refinancing are concerned about fees and costs associated with refinancing, which are often as high as their original loan. There are some loans out there now with no costs or low costs. Most come with a slightly higher interest rate, but if you have great credit and can get your new loan from your current mortgage company, you may be able to get both the low cost or no cost mortgage as well as current interest rates.

Interest Rate Instability and Home Mortgage Refinancing

Remember that mortgage rates can fluctuate frequently, sometimes daily or several times a day. If you are refinancing at a time when you think rates may soon go up, you should ask for your lender to float the rate for 90 days, or create a provision in your application that says you will only pay the change in the interest rate if it goes down.