Mortgage rates dipped to record lows this week, with the 30-year fixed rate hitting 4.74%, Bankrate.com reported Wednesday from its national weekly survey. Adjustable rate mortgages also slid as the average 5-year ARM touched 4.06% and the 7-year declined to 4.46%. Looming uncertainty over the pace of economic recovery has sent investors to safer plays in Treasurys, and “will help keep rates at ultra-low levels,” the note stated. At current rates, homeowners who refinance would save on average $199 each month.
Seeing rates this low get everyones excitement up. The knee jerk reaction is to go out and refinance, because the average person will save 200 a month. However, while you will most definitely save money refinancing is not for every homeowner. When people get wrapped up in the excitement of lowering their mortgage payment they often forget about the upfront refinancing fee’s.
Make sure to run the numbers before you pull the trigger on a refinance. Origination fees, the appraisal, pulling the credit score, having your title insurance all these things do add up. If you plan to move within the next few years the numbers might not pencil. For instance, if you will be saving $100 a month, but you know you will be moving in two years. The savings might look good but if it costs $3,000 out of pocket you will still end up $600 short.
For homeowners who have been living at their home for a long time, refinancing may hurt their wallets as well.
“If you’ve had your mortgage for a number of years, your monthly payments are probably primarily principal at this point,” says Cohn. “If you refinance, you’re going to add on years and years of interest payments, which may take away the benefit of refinancing. Because in the long run, you’ll end up having paid more money over the life of the new loan.”
Those who are planning to refinance should be prepared for stricter lending standards. Only a high credit score and a secure income will ensure premium rates. Also, homeowners should have sufficient equity in their homes or else have to put more money down.
Most banks today when you are refinancing require that you have at least 20 percent equity in your property. With property values having fallen over the course of the past few years, many people are no longer with the equity position that they had when they purchased the property. There are a lot of people that bought with 10 percent down who may not have the 20 percent equity in order to be able to refinance.
So before spending the money to refinance, run the numbers. Don’t let the excitement of lowering your payments blind you from the financial math.