Homeowners: Should You Refinance Your Loan?
As a direct result of the global credit crisis of 2008, the Federal Reserve will soon have the authority to put hundreds of billions of dollars into the credit markets with the express purpose of driving interest rates down as low as possible. This, in turn, will make home ownership more attractive; it will also stimulate the market for refinancing of existing mortgage loans.
Not everyone can benefit from this development
Clearly, you should consider the refinance of your loan if you can get a lower interest rate. But loan refinancing is not for everyone. For example, if the market value of your home is lower than the unpaid balance on your mortgage, then no lender will refinance your loan.
Also, if your credit history is spotty and your FICO score is low, many lenders will not offer you the lowest rates to refinance your loan.
Who MIGHT benefit from refinancing their loan?
But let’s assume your credit is good. Let’s also say that you live in a part of the country where real estate values have held up and/or you owe less than the market value of your home. If this describes you, then you should seriously consider a refinance of your loan. Under the right circumstances, you can make a significant dent in your monthly expenses.
But before you accept an offer to refinance your loan, you should do some research and compare multiple offers.
What you need to consider
If your current mortgage interest rate is relatively low, say one percentage point higher than what the market is offering now, it may not make sense to refinance your loan. You simply may not get a good return on your investment.
Remember: when you refinance your loan, you will be paying closing costs. For example, if those costs are $3000 and your refinanced loan results in a monthly savings of $100, then it will take 30 months to recoup your costs. Ask yourself: do you plan on staying put for the next 30 months? If so, consider refinancing your loan. If not, then look for a better deal.
If you’re smart, you’ll shop around
If your credit is good and the real estate values in your town have held up, many lenders will offer you what is called a “no-obligation” quote. Take it and shop around. You can do so online or locally if you like. Also talk to your existing lending institution and get a quote. This is smart for a couple of reasons. First of all, you are a known customer. If you have been current in your payments you are a known quantity — they’ll have confidence that you can continue to be a good bet. As a result, your current lender may be willing to waive some of your closing costs.
In any case, don’t take the first deal that your are offered. Get at least 3-4 quotes so that you can make an informed decision.
The latter part of 2008 has seen a lot of gloomy predictions about the future. But at the same time, there are a lot of solutions being worked out to ease the credit crunch and make it easier for you to lower your monthly expenses. If you pay attention to what is happening in the credit markets, you may come out ahead when everyone else is wondering what to do next.