Flurry of Mortgage Refinancing May Signal Opportunity

By Richard Barrington
Calculators for Mortgages Columnist

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2008 began with a flurry of refinancing activity. This should be a cue for other mortgage holders to consider whether refinancing makes sense to them as well. It may turn out that a refinancing opportunity could save you some money, or at least make your finances more manageable. Three prominent reasons for refinancing are explained below.

Lower Your Interest Rate

If you signed on for a fixed rate mortgage, the interest rate was set for the duration of the mortgage. If interest rates subsequently fall, the only way you can take advantage of a lower rate is by refinancing.

Switching to a lower interest rate is the most compelling reason for refinancing. Given the popularity of 30-year mortgages, even relatively small differences in mortgage rates can add up to substantial sums over the life of the mortgage. So, when interest rates fall, it is a good idea to see if you can save money by refinancing.

A refinance calculator is a valuable tool for making comparisons between your existing mortgage and a mortgage at current rates. A refinance calculator will help you see the difference a lower interest would make to both your monthly payment and your total interest expense over the life of the mortgage.

The reason this is a good time to look at a refinance calculator is that 30-year mortgage rates have fallen substantially since last summer. It is this drop in interest rates that has sparked a great deal of the refinancing activity so far in 2008.  

Stabilize with a Fixed Rate Mortgage

If instead of a fixed rate mortgage you have one with adjustable rates, another possible reason for refinancing is to stabilize your monthly mortgage payments. One drawback of adjustable rate mortgages is that when the interest rate resets, it can radically change the monthly mortgage payment. This adds an element of instability to your monthly budget -- an element that can be dangerous when interest rates move against you.

With interest rates low, this is an especially good time to consider switching to a fixed rate mortgage.

Restructure Your Mortgage

Finally, another possible reason to refinance is to restructure the remaining term of your mortgage. For example, if you are having trouble meeting your monthly mortgage payments, refinancing your remaining balance over a fresh 30-year term will spread that balance over a longer period and thus lower your monthly payments.

Be advised that this is likely to result in your paying more interest over the life of the mortgage, but it is worthwhile if it enables you to continue to meet your monthly payments. A refinance calculator can help you see the effect of this type of refinancing on both your monthly payments, and on your overall interest expense.

With any form of refinancing be sure to check your current mortgage for prepayment penalties. Another use for a refinance calculator is to help weight the effect of these penalties against any potential interest savings.



About the Author
Richard Barrington is a freelance writer and novelist who previously spent over twenty years as an investment industry executive.