Refinance Now?

Steeply lower mortgage rates are one of the few welcome side effects of the implosion in the credit markets. According to Bankrate.com, the average rate on a 30-year fixed mortgage is now just over 5%, down about 1.5% from last summer. If your credit is good, you may be able to lower your monthly mortgage payment by quite a bit by refinancing your existing mortgage. But is it worth it?

The first thing to consider is how long you plan to stay in the house. The longer you plan to stay in your current home, the more attractive a refinance is. If you think you’ll be moving in just a few years, however, your savings aren’t likely to outweigh the refinancing fees, which can run as high as $2,000. After that, however, the math can get complicated.

Since mortgage interest is tax deductible, for example, lower interest rates may translate into higher taxes, so your savings may not be as much as a simple before-and-after comparison of mortgage payments may show. You should also consider how much you could earn if you invested the fees you’d pay on a refinance. Invest $2,000 for 20 years at an average 9% annual return and you’d end up with $26,500. Will your refinance save you that much over 20 years?

One thing most mortgage experts agree on is that a homeowner who currently has an adjustable-rate mortgage and plans to stay in his/her home for several years should seriously think about a refinance. As the recent mortgage mess showed, ARMs can be hazardous to your financial health. A fixed-rate mortgage may not save you much in monthly payments, but it will give you some assurance that those payments won’t suddenly hit the stratosphere.