Homeowners: Should You Refinance Your Loan?
As a direct result of the 2008 global credit crisis, the Federal Reserve will soon be empowered to invest hundreds of billions of dollars in the credit markets with the express aim of keeping interest rates as low as possible. This in turn will make home ownership more attractive; it will also stimulate the market for refinancing existing mortgage loans.
Not everyone can benefit from this development
Of course, you should consider refinancing your loan if you can get a lower interest rate. But refinancing loans isn’t for everyone. For example, if the market value of your home is less than the balance on your mortgage, no lender will refinance your loan.
Even if your credit history is patchy and your FICO score is low, many lenders won’t offer you the lowest interest rates to refinance your loan.
Who COULD benefit from refinancing their loan?
But let’s assume your credit rating is good. Let’s also assume that you live in a part of the country where property values have held up and/or you owe less than the market value of your home. If this applies to you, then you should seriously consider refinancing your loan. In the right circumstances, you can significantly reduce your monthly expenses.
However, before accepting an offer to refinance your loan, you should do your research and compare multiple offers.
What you need to consider
If your current mortgage rate is relatively low, say one percentage point above what the market is now offering, there may not be any point in refinancing your loan. You just might not get a good return on your investment.
Remember, when you refinance your loan, you pay closing costs. For example, if those costs are $3000 and your refinanced loan results in a monthly savings of $100, it will take 30 months to recoup your costs. Ask yourself: Do you plan to stay for the next 30 months? If so, consider refinancing your loan. If not, look for a better deal.
If you’re smart, you’ll shop
If your credit rating is good and the real estate values in your city have held up, many lenders will offer you a so-called “non-binding” offer. Take it and poke around. You can do this online or on site if you prefer. Talk to your existing bank and get an offer. This is wise for several reasons. First of all, you are a known customer. If you’ve been up to date with your payments, you’re a household name – they’ll trust 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, do not accept the first offer that is offered to you. Get at least 3-4 quotes so you can make an informed decision.
In the second half of 2008 there were many gloomy predictions about the future. But at the same time, many solutions are being worked on to ease the credit crunch and make it easier for you to reduce your monthly expenses. By paying attention to what’s happening in the credit markets, you can stay ahead of the curve when everyone else is wondering what to do next.