Predicting mortgage interest rates is a gamble which homeowners take when they refinance to take advantage of lower rates. When rates are historically low it is a fair assumption that at some point they will inevitably rise. Thus it makes good sense to refinance to a better deal when other variables are aligned in the homeowners favor.
Lower interest rates should equal lower monthly mortgage payments, but this isn’t always necessarily the case. Refinancing isn’t a good option if it will add PMI to a mortgage payment, most usually applied when equity is lower than 20 percent, or if the costs of refinancing are added to the term of the mortgage. There are various factors to consider before plunging into a mortgage refinance.
The ideal time to refinance is when there are no penalty fees attached to the current mortgage. Homeowners who are not planning to move home within the next few years can benefit by refinancing to a lower interest rate, particularly if they also opt for a shorter term at the same time, thus saving even more on interest payments. The optimum time to refinance is when credit scores are excellent thus giving the benefit of preferential rates which may be even lower than headline mortgage rates.
Moving from an adjustable rate mortgage to the security of a lower fixed rate makes financial sense in most circumstances. It is imperative to factor in all the actual costs associated with a refinance. The closing costs of a mortgage refinance need to be considered together with any legal fees and valuation costs. It is important to calculate how long it will take to recover these costs to break even, and homeowners should utilize an online mortgage refinancing calculator.
It is essential to bear in mind that if the costs are added to the mortgage total, then interest will be applied to these additional costs. This should be factored into the calculations. Those who can afford to pay the refinancing costs upfront will benefit the most on total savings, rather than paying interest on them for the term of the loan.
Refinancing is also worthwhile if the mortgage holder moves from an interest only vehicle to a mortgage which benefits from capital reduction. Moving from one fixed rate to another lower fixed rate is another reason to refinance. However the associated penalty fees may make this option an unwise move and may not prove to be cost effective until the penalty phase has expired. Fees need to be considered against the potential gamble of higher interest rates once the current fixed rate ends.
The most crucial factor when considering mortgage refinancing is if the change to a lower interest rate will pay for itself within a set time frame. If a homeowner knows the exact time when the real savings will begin they can make an educated assessment that this represents a good long term financial move worth taking.