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Most of the old rules of thumb no longer apply in determining
when to refinance. Lenders now price interest rates differently,
dramatically altering closing costs, and thus changing how we
analyze the effectiveness of refinancing. However, the basic
opportunity is that fixed rates are now at a 24-month low and the
economist's majority opinion leans to rates staying stable for the
short term, with a constant, recurring threat of Greenspan/inflation
pushing them up. Thus, the homeowner's concern is if and then when
to refinance to the lowest rate possible.
If you purchased you home in the last couple of years, it's likely
that today's fixed rates are lower than your existing rate (if you
took a fixed loan, or a 3 or 5 year type ARM). Today's fixed rates
are certainly lower than what your monthly, 6-month or 1-year ARM
will shortly adjust to. Thirty-year fixed loans are now available
with no closing costs, so you can consider a refinance even if you
are in an intermediate home, not the dream house you'll be living in
for life.
"No-closing-cost" refinances work by your taking a slightly higher
rate than you could buy if you paid "points" (discount fees). In
this scenario, your trade-off consideration is whether the smaller
payment difference is enough to justify the refinance, as opposed to
staying with your present payment and simply selling the house in
the next couple of years. If you're in an ARM loan now, and planning
on moving up fairly soon, the terms (all the factors/parts of the
ARM) may not be high enough or bad enough to justify the loan
change. Other factors to consider in refinancing are the limited
tax benefits, in that tax laws may limit the deductibility of interest,
based on the amount of your refinance loan versus the original price of
the property. You must also consider the possibility of losing lower life
caps or specific conversion option advantages if you're thinking about
refinancing to an ARM with a lower rate but probably higher caps. Also,
you should consider the potential for your existing ARM rate to drop to an
even lower rate if/when ARM rates decline back to their normal position of
being less than fixed rates.
Another strategic analysis is to mentally separate owning the home from
owning the loan: how long would you stay in this home, regardless of the
loan? Really, how long can you live in this house? Does this property have
appreciation potential that justifies keeping it or selling it? At today's
low rate, is now the time to move up, or stay put? As a loan officer, I
see a lot of sellers moving away from a loan that they initially thought
justified the refinance expense, but then shortly decided didn't justify
the property.
Obviously, financing the largest asset in the normal estate is critical.
However, any time the opportunity for lower costs exists, they need to be
analyzed. Hopefully, based on the considerations above, that analysis can
be thorough. After you consider it, if today's rates look better than what
you have or will have, act immediately. The refinance process is easier
and quicker than before, and shouldn't be as complicated as even the above
analysis. One certainty with interest rates: they always move up more
quickly than the time it takes for them to fall. If today's rates are to
your advantage, you should move ahead to take that advantage.
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