By Mike Conway
May, 2009
The drop in interest rates to record lows has created a stampede to refinance home mortgages. 30-year loans may be found with rates below 5 percent – more than 1.5 percent lower than last summer. Before you join the rush, there are several factors you should consider:
- If you are currently in an adjustable rate mortgage, now is probably a good time to lock in a low rate. Interest rates will only go higher, and removing the risk of soaring payments makes good financial sense.
- Generally, if you can improve your current rate by 1.5 percent and you plan on staying in your home for at least three more years, refinancing is a viable consideration.
- It is important to look at the big picture and consider all of the costs associated with refinancing. These costs typically include:
- Application and appraisal fee
- Survey costs
- Loan origination fee
- Taxes
- Attorney fees
- Title search
- Credit report fee
- The dollar amount of interest savings can be significant, but don’t forget about taxes. Your mortgage interest is deductible, so paying a lower rate could ultimately mean slightly higher taxes.
- The total savings figure doesn’t take into account the time value of money. With the potential increase in inflation, the savings dollars will be worth considerably less in 30 years. The savings realized from a lower interest rate also ignores the compounding of interest.
The current economic situation is very unique, and it creates new circumstances each day. At
Kanaly, we are our clients’ financial advocate and are watching for ways to help navigate these challenges.
