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The scaling down of interest rates by the Federal Reserve has brought down the Mortgage rates also. However, fixed mortgage rates do not necessarily have to come down with the interest rates as they are dictated by the bond rates. It is often believed that refinance is only recommended if the new interest rate is at least two percentage points lower than the current mortgage rate.
This belief is not very practical nowadays. It was applicable when one could only get a 30-year fixed rate mortgage. Today there are many options for financing homes including fixed mortgage rates with terms of 15, 20, or 30 years; five- and seven-year balloon loans; and a wide variety of Adjustable Rate Mortgages (ARMs). It is better to get out of the insecurity of an ARM and settle for a fixed rate.
It does make sense to go in for ARM, if you are planning to stay in a home for only a few years, as an ARM can be got for much less than a fixed rate mortgage. Moreover, if you do not qualify for a loan at higher fixed mortgage rates, ARM is your answer as it will lower your monthly payment enabling you to qualify for the loan. If, however, you already have an ARM, it will be a good idea to consider the present-day fixed mortgage rates as they are very attractive.
It is also the right time to take out a home equity loan as these rates follow the prime rate and as such they are directly affected by the Fed’s rate cuts. They are, however, always higher than the regular mortgage rates. The home equity line of credit works differently and should only be used wisely.
In order to decide whether to refinance or not, it is necessary to weigh the savings each month due to the refinancing as against the closing costs, which could be considerable. It would be prudent to refinance, if you are planning to stay in your house longer than it takes to recover the costs of refinancing.
You can avoid a lot of paperwork and save on certain closing fees, if you can convince your current lender to match the lower current mortgage rates prevalent in your area. For this, you may have to do some research work, but it might be worth your while. Some lenders have been known to lower the ongoing mortgage rate for free in order to maintain the business. Elizabeth and Tony Miller are now saving $270 a month on their $348,000 loan simply by refinancing for free for the second time this year.
To determine whether or not to refinance, you'll want to calculate what you could save each month by refinancing and weigh those savings against your closing costs, which can add up to a couple thousand dollars. If you plan to stay in your house longer than it takes to recoup the costs of refinancing, then you should consider giving your mortgage rates a makeover.
The process is almost always easier and cheaper if you go through your current lender. First research competitive mortgage rates in your region and then call your lender to see if it will match those offers. Not only can you avoid having to do a lot of extra paperwork, you may also be able to save money on certain closing fees, such as appraisal fees.
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