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February 09, 2009

Is it time to refinance?

Mortgage interest rates are at their lowest level in years. This is great news for people trying to buy a house, but it may also be important for people who already own a home and have a mortgage. How can existing homeowners benefit from these low rates?

Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:

"Well, they can do what's called a refinance of their mortgage, where they go and get a new mortgage loan and use that loan to pay off their existing loan. And the benefit will be that if the interest rate is substantially lower on the new mortgage, their monthly payments will be lower. Now, everyone doesn't want to do this because there are sometimes up front costs called closing costs to get a new mortgage. The rule of thumb that many professionals use is that you should consider refinancing if the difference between your existing mortgage and the new mortgage rate is 2 percentage points or more. That is, for example, going from a 6 percent mortgage rate to a 4 percent mortgage rate, and that you plan to stay in your home at least 5 years. Why that's important is that gives you enough time to recover in terms of your lower mortgage payments those up front closing costs. Now, also if you have an adjustable rate mortgage, where the rate may be relatively low now, you may want to hop over to a fixed rate so you can lock in that interest rate and don't open yourself up to potential increases in the future in that interest rate."

Posted by Dave at February 9, 2009 08:19 AM