Is it High Time to Refinance?

By Jonathan Haeber
CMR Columnist

We're coming up on another Federal Reserve meeting. And unless something drastic happens, interest rates will likely hike up again. This has put people with high-risk loans in a frenzy. They're refinancing their home mortgage like never before.

Still, many homeowners decide not to refinance, even when it's in their best financial interest. "Realistically, a vast majority of people close their loans, make their payments and don't worry about it again," BancMortgage Financial Corp's Bob Cannon says. "They don't refinance when they should be looking at it."

Follow the Rule of Two

According to most financial advisors, the best rule to follow is the 2% rule. If the prime rate on mortgages drops more than 2% below your current rate, then refinancing your home mortgage would be beneficial. However, Bankrate's Don Taylor says it's not that cut-and-dry. In some cases the rate you're refinancing may even be higher than the interest rate you're paying. For example, if you took out a 5/1 ARM and your five-year term is about up, then you may want to consider refinancing to a 30-year fixed in order to lock in the rate, even if it's higher than your adjustable mortgage. Private mortgage insurance (PMI) may also be dropped after refinancing, which could reduce your payment.

Eyes on Inflation

The best way to know when to refinance is by regularly monitoring the Federal Reserve, and keeping an eye on inflation. If inflation begins to climb, you can be sure that the Fed will begin raising short term interest rates. Even though mortgages are tied to Treasury bonds, rather than short term rates, they are generally a good indicator of where home mortgage interest rate trends will be going.

Source
Bankrate: When to Refinance Your Mortgage

About the Author
Jonathan Haeber is a marketing writer for Discovery Channel Stores. He recently purchased his first home, and took a self-taught crash course in home mortgages.

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