Interest Rates Drop

By: EconomyWatch Content   Date: 4 November 2009

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Opting for mortgage refinancing when interest rates drop can lead to reduced payment tenure and lower interest payments. In a declining interest rate regime, either buying a new home or refinancing an existing home can be a very attractive option. You need not wait for interest rates to drop substantially to reap the benefits of declining interest rates. Even a 1% drop in interest rate will lead to substantial savings.

Mortgage Refinancing When Interest Rates Drop

If you are planning for mortgage refinancing given the interest rates drop, you may consider certain important things. These include:

Is It Right For You: Calculate the total closing costs for your existing mortgage and divide this by the number of months you plan to stay in the same home. Compare this amount with the reduction in the mortgage payment. If the reduced mortgage payment is higher than the monthly amount of the refinance, you should opt for mortgage refinancing.

Purpose of Refinancing: If you have already built sufficient equity on your home, you can opt for ‘cash out refinance.’ With the cash out refinance option you can get a cash loan based on the equity built on your home. With this option, your total loan amount will increase and so will the monthly repayment. Consider why you want the cash; if you need cash desperately you can opt for cash out refinance. Usually, homeowners opt for equity line of credit when interest rates are low.

Fixed Interest Rate: It is better to opt for fixed interest refinancing, rather than an adjustable rate mortgage, when interest rates drop. Since a home loan is a long term loan, interest rates will rise in any case, after some time. It is good to lock-in with low interest rates so that you do not suffer when the interest rates rise.

While looking for mortgage refinancing when interest rates drop, ensure that you are eligible to qualify for a more expensive home. This eligibility is based upon your monthly income and total debts in relation to your monthly payment. You may contact a mortgage professional to help you make the right decision.


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