Facts about refinancing
Interest
rates and mortgages have been a hot topic in the news
for a variety of reasons. First of all, interest rates
have been in the spotlight since the Federal Reserve has
been raising them consistently for 17 times in a row.
And since interest rates have been on the rise, mortgage
payments have also been getting more expensive for
the most part. But, keeping all of this in mind, there
has actually been an increase in the amount of people
interested in refinancing. Many people wonder why someone
would want to refinance when interest rates are on the
rise. But there are a few theories as to why it could
be a good decision to refinance right now.
The article, “Make sense out of refinancing,”
from The South Mississippi Sun Herald, and also
featured on topix.net mortgage section, explains a few
important things about refinancing. According to the article,
refinancing currently account for more than a third of
all new mortgage applications.
“There are two reasons people would refinance when
rates are rising. The first is to get cash out of a home.
Home values have been soaring in the past few years, leaving
many homeowners with properties worth far more than they
owe on their mortgages. By refinancing with new, bigger
loans, even at higher interest rates, these borrowers
can pay
off older mortgages and have money left over for other
things. This can make sense - sometimes. Rather than move
to a bigger home, for instance, a growing family might
refinance to get cash to expand the one they have. But
refinancing does not make sense if the money is used for
less important things, such as vacations. The long-term
interest payments on a 30-year
mortgage double or even triple the cost of whatever
you buy with that money. As a rule of thumb, long-term
debt should be used only to buy things that provide a
long-term benefit.”
So, the thing to remember with refinancing is to use the
money you gain wisely, and not to spend it on useless
things that do not provide a long term benefit. The other
reason why people may want to refinance right now is to
replace one type of mortgage with another. There are fixed-rate
mortgages and adjustable-rate mortgages.
“The other reason for refinancing when interest
rates are rising is to replace an adjustable-rate mortgage
with a fixed-rate one. Although fixed-rate loans have
been at attractively low levels in recent years, Americans
gobbled up adjustable loans anyway - lured by the low
'teaser' rates charged during ARMs' first 12 months. ARM
rates typically adjust every 12 months, often by adding
2.75 percentage points to the current interest rate on
U.S. Treasury notes with one year to maturity. Those are
yielding about 5.25 percent compared with about 2 percent
two years ago. So a typical ARM adjusting today is going
to 8 percent. Many borrowers, shocked by their new, higher
payments and worried that rates will keep going up, are
refinancing to lock in fixed rates while they are still
at a reasonable 6.5 percent to 7 percent.”
“Sounds like a simple decision. But, compared with
the switch from one fixed-rate mortgage to another, it's
not. With the fixed-to-fixed move, you look at the monthly
payments each requires, then decide whether you'll have
the loan long enough for any savings to pay off the refinancing
costs.”