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Mortgage Refinance Loans

Mortgage Refinance Guide Step 5: Interest Rates and Mortgage Refinance Loans

    When considering interest rates and mortgage refinance loans you have two things to worry about. The first is whether the interest rates have dropped low enough for you to save money by refinancing your mortgage. The second is whether you should choose a fixed-rate or adjustable-rate mortgage refinance loan. While it may sound difficult, don't worry. Once you know what to look for, it will be easy to choose between mortgage refinance loans.

The Lower the Better When it Comes to Mortgage Refinance Loans

    It doesn't make much sense to refinance your mortgage if the interest rate you would get is higher than the one you currently have. That's because higher interest rates mean you have to pay more to borrow the money. Therefore, when looking for mortgage refinance loans you should get the lowest interest rate you can find. But how low is low enough for you to consider refinancing?
    The standard rule used to be that you should not look for mortgage refinance loans until the interest rate was two percent lower than the interest rate on your current mortgage (Irwin 212). That old rule came about because closing costs used to be so expensive that you wouldn't start to save money from refinancing until the interest rate dropped two percent (Irwin 212).  However, today that rule no longer applies because the fees associated with mortgage refinance loans are lower than they used to be (Opdyke 53). Therefore, there is no rule to how low is low enough for you to refinance. You should refinance anytime you can save money. To learn how to tell if you will save money by refinancing, read Step Two of our Mortgage Refinance Guide When is the Right Time to Refinance Your Mortgage.

Adjustable or Fixed Rate Mortgage Refinance Loans: Which is Better?

    The actual interest rate is not the only thing to consider when looking for mortgage refinance loans.  You must also decide whether to a get an adjustable or fixed interest rate mortgage.  Choosing between adjustable and fixed rate mortgages is difficult because you do not know how interest rates will change in the future. They could go up or down. Therefore, when picking out the type of interest rate to refinance with, you should always hope that luck will be on your side.  
    If interest rates drop by a large percentage, many people will switch from an adjustable-rate mortgage to a fixed-rate mortgage (Fisher 36). Fixed rate mortgages are much more stable than adjustable-rate mortgages because you always know how much you will owe each month.  However, the downside of fixed-rate mortgages is that they normally have a higher interest rate than adjustable-rate mortgages ("Common Questions from First-Time Homebuyers").  Therefore, when rates drop drastically people switch from adjustable-rate mortgages to fixed-rate mortgages because it is the best time to get a low rate on a fixed-rate mortgage. If interest rates are low and you plan on living in your home for a long time, switching to an fixed-rate mortgage might be a smart move because you will be ensured that your interest rate will not increase over time even if the market interest rate does (Fisher 36).
    If interest rates are high, you may want to look for mortgage refinance loans with an adjustable-rate mortgage. The logic behind this is that if you take an adjustable-rate mortgage that has a fixed interest rate for the first few years before switching to an adjustable rate, you will get a lower interest rate than the interest rates on fixed-rate mortgages. Because the interest rate is relatively high, when it does drop, the fixed period of your mortgage will be up and you will have to start paying the market interest rate which is lower or the same as the initial interest rate you were paying (Reed 146). That strategy can be risky because you can never be sure that interest rates will drop.  However, it will work if interest rates do drop in the way you think they will.  

Mortgage Refinance Guide Sections:


"Common Questions from First-Time Homebuyers." Homebuying. 25 Oct 2005. U.S. Department of Housing and Urban Development. 6 Sept. 2006.

Fisher, Sarah Young and Shelly, Susan. Complete Idiot's Guide to personal Finance in Your 40's and 50's. Indianapolis: Alpha Books, 2002.

Irwin, Robert. Tips and Traps When Mortgage Hunting, Third Edition. New York: McGraw-Hill Professional, 2005.

Opdyke, Jeff D. The Wall Street Journal. Complete Personal Finance Guidebook.  New York: Random House Inc., 2006.

Reed, David. Mortgages 101. New York: AMACOM Div American Mgmt Assn, 2004.