Should You Refinance Your Mortgage Now to Lock in the Lowest Interest Rates in History?

This is a question on many peoples’ minds right now. Do you lower your interest rate from 5%+ to get 3.79% or less for the next 5 years? Let’s discuss the issues that will help you make a good financial decision.

When you get out of a mortgage before the renewal date, unless you are in an open mortgage, you will likely face a pre-payment penalty of some sort. If you are in a variable rate mortgage the penalty is usually only 3 months of interest. But in a fixed rate mortgage the prepayment penalties can be quite steep. In fact, as a rule of thumb, the penalty is typically similar to the amount you would stand to gain with the new rate in an interest rate market that is going down.

However, there are other issues that are just as important to consider. If part of the reason you are considering refinancing your mortgage is that you have some credit cards or loans or lines of credit that you would like to pay off, each of which has a monthly payment that may be getting uncomfortable to pay and at an interest rate that is higher than a 3.85% mortgage rate, that may be an additional reason to consider refinancing. You can save even more interest and lower your monthly payments.

Another issue to review is staying in your current mortgage until renewal time. You of course would keep the same rate you currently have until then and when you renew  take whatever the interest rates are available at that time 2-4 years down the road.  And if history repeats itself, we cannot likely count on the mortgage rates staying as low as they are now for too long. Thus the real saving may be the lower current rates that you could guarantee yourself now for those years following your current renewal date. That saving alone could be $3500 a year for as many years as you have left after your current renewal date based on a $250,000 mortgage that is currently at 5.25%. Even if you only have 2 years left on your mortgage, refinancing now may provide you with the greatest interest savings overall. The penalty you will pay and add on to your mortgage is guaranteed to be recovered by the lower rate. So the real issue is do you want to guarantee a lower rate for three years after that?

So, even though you will likely incur a substantial penalty if you are in a fixed rate mortgage, that amount would be added to your new mortgage and the lower rates would still save you much more than the penalty over the five year term and also lower your monthly payments now both from a mortgage perspective and getting rid of other debt payments and higher rates you may be currently paying on any credit cards or higher interest loans.

For a more detailed review of your specific situation, including what options, rates and savings you can expect, call your mortgage specialist.