How do I know when to refi?

How do I know if this is a good time to refi?

With the recent drop in interest rates, many consumers are asking, "is this the time to refi?" The decision is more complicated than "did my rate drop?" There are often many fees associated with refinances, and consumers need to calculate when a good time for them is. Mortgage applications rose over 8% last week.. and there is good reason for it.

When the Fed drops rates, most banks drop their rates on certain mortgages too. People that are locked into negative amortization or option ARM loans, where they aren't even covering their interest or had a teaser-rate loan, may be looking now to refinance.

In general, Home Equity Lines of Credit see rate drops the day after the Fed. How do you know if you should refi? Calculate the savings per month with the new rate, and ask your lender what the refi will cost you. Determine what the break-even point is in months - 6 months and you plan to stay a year? You get a net win! 12 months and you plan to move in the Spring? Keep that higher rate.

Option Adjustable Rate Mortgages, known as Pay Option ARMs, are the risky loans that let people pay less than the interest and accumulate mortgage principle. These tend to drop 30 to 90 days after a Fed rate drop. Margins always tend to lag the Fed rate. To figure out if you should refi, get a good faith estimate with all costs from the lender. Do the same analysis as for a HELOC. With the rate change, what is the savings per month? Then, divide the total cost of the refi into the savings, and you will get your break-even point in months. If you are planning to stay in your home longer than this number of months, you will save money.

Long term rates, 30 year fixed loans, generally remain flat and may even increase. I would not consider this a viable option right now.

Short term interest only loans, where the first 3, 5 or 7 years is held constant, will decrease. To figure out if you should refi, get a good faith estimate with all costs from the lender. With the rate change, what is the savings per month? Then, divide the total cost of the refi into the savings, and you will get your break-even point in months. If you are planning to stay in your home longer than this number of months, you will save money.

What are some intangibles to consider?

1. Is your mortgage stressing you out? Is the unknown tough to handle? If so, you might opt for a short term interest only loan or a fixed mortgage, even if the rate is higher.
2. Is your principle amount climbing faster than the appreciation rate? You may want to refinance even if the rate is the same, just to "stop the bleeding".