If you purchased your home with a fixed-rate mortgage, you probably realize the market is bound to fluctuate while your monthly mortgage payment will not. If the market’s interest rate increases, you’ve made a good deal. If it decreases, however, you have some things to consider in terms of whether you should refinance to lock in the lower rate.
First, keep in mind the percentage point break. How much lower is the current interest rate than what you’re paying on your current mortgage? Despite what may seem like an attractively lower rate, the general rule is you should only consider refinancing when your mortgage rate is at least one full percentage point higher than current market rates.
Next, take a look at what your lender would charge you in transactions fees. These are the fees you will be charged to actually go through with the refinance in the first place. If the fees are high enough, you may lose all or most of the benefit you would have gained in refinancing anyway. It is definitely something to take into consideration.
It is also important to realize that your application to refinance may be rejected. It really isn’t such an uncommon thing, since over 50% of Americans are seeking refinancing options at the moment. In the first six months of 2008 alone, well beyond 50% of applications to refinance weren’t even approved.
This means there is yet another factor you need to consider. You need to meet certain criteria in order to refinance. The best rates you can obtain through refinancing will often be determined by your credit score. 720, though considered strong by some as far as FICO scores go, may still not be adequate to obtain the refinance rate you want. In order to get those low rates you’re looking for, the goal would be to have a 740 or higher.
You also need to shop around, as a final note. That rate may not be your best option. Visiting many lenders and doing your research is the only way to know. It is ultimately the best way to net yourself the lowest rate possible, even though it will take some time. It will undoubtedly be worth the effort, because this was what you were seeking in the first place.
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