Just last year, mortgage rates were near 5.5%.  A few years before, rates averaged anywhere from 7% and up.  Now were seeing rates as low as 3.45% in some cases!  Many factors have contributed to rates taking a nose-dive to these low levels, but to be sure – they can’t go much below the current level.  The most current dive in rates is a result to the second round of easing the Federal Reserve announced a few weeks back.  The Fed’s move basically made money cheaper to lend.  This type of easing is not done lightly, so don’t expect it to happen again anytime soon.

Where do you stand?
Assuming you will qualify for a refinance, you must ask yourself a few quick questions to assess whether or not it is smart for you to refinance.

• What are your cash reserves?
• How long do you plan to stay in your current home?
• What is your goal for the refinance?  (To gain a lower rate?  To cash out?)

Refinancing can be a great way to save money, to pay off debt, to do home renovations, and more.  Because of this, refinancing can be a great tool for utilization, but it can also be a lure that will get you into financial trouble.

One must take all potential outcomes into consideration and weigh them carefully.  If your plan is to refinance and draw cash out of your equity, proceed with caution.  Many of the homeowners being foreclosed on today did the same thing.  Falling real estate values will really hurt you in this case.

If your plan is to take advantage of a lower interest rate and not increase your loan balance, refinancing can save you a bundle.  On an average $200,000 15-year loan, one could save $62,904 in interest by utilizing a 4.25% rate compared to a 7.5% rate.  On a 30-year loan, your savings will be even greater.

Break-even period
When refinancing, you will likely pay a refinancing fee, or have to pull the fee out of your equity.  When doing so, you are re-investing in the loan.  Most loans should be kept 3-5 years after a refinance in order to break-even.  This simply means it will take a certain period of time for the savings to catch up with the amount of money you spent to achieve these savings.

If your plan is to sell the home in a shorter time period than 5 years, you could likely lose money by refinancing.

For example, lets say by refinancing you save $150 a month and the cost to refinance was $3,800.  This means it will take 25.33 months for the savings to catch up with you.

Calculated $3,800 divided by $150, equals 25.33.  In this scenario, it would take you 2 years and 1.33 months to break-even.  To realize actual savings, you must keep the home longer than the break-even point.

Other considerations
The previous example was a simple situation.  Other situations that are more complicated can include a home that has a relatively new loan due to a recent purchase or previous refinance.  In this situation, you must assess whether or not you have hit your break-even period on your current loan.

You must keep it in mind that there will be surprises in life as well.  An unexpected move could result in a loss of money due to the refinance.  You never know when a job transfer or other situation could cause you to move.  One must weigh the pros and cons before making a decision.

Alternatives to refinancing
An alternative rarely considered by mortgage holders is the option of paying down the balance on the current loan they carry.  Most loans allow you to make principle payments in addition to your monthly payment.  Say you take that $3,800 you were going to use to refinance, and pay down your principle in that amount.  Future interest calculations will be made on the reduced principle.  The lower that amount is, the lower the future interest.

In summary
Refinancing can be a great option anytime the interest rates fall below the interest rate on your loan.  Refinancing can save big money, but must be done with all the facts at hand.  Speak to your financial adviser, a loan officer, and a real estate broker you trust so that you can make an informed decision.