What to Consider if Refinancing Your Home

With mortgage rates at near-historic lows and the economy showing signs, albeit small ones, of a recovery, both fixed and adjustable rates will eventually increase.

Fannie Mae, Freddie Mac and the Federal Housing Administration have programs that allow borrowers with little or no equity in their homes to refinance existing mortgages. It is best to contact a mortgage professional directly if you’re seeking more details on such programs.

The question, though, is: Who should be looking into refinancing at this time?

The answer is: You should be looking to refinance at this time if you have either an adjustable rate mortgage or an interest-only mortgage.

Adjustable Rate Mortgages

Adjustable rate mortgages, known as ARMs, are tied to economic-related indices, such as Treasury rates. These indices, which are used to set the ARM rates, are low at this time. As they increase, so will the rates impacted by them.

While many ARMs have been adjusted downward in recent months, it is likely that they will be moving upward either in late 2010 or early 2011. Refinancing options for fixed rates will still be available in the future, but those rates will also increase.

In strategizing your mortgage plan, long term versus short term, you should weigh your options and, if applicable, secure your long-term rate at this time.

Interest-Only Loans

As with ARMs, interest-only loans have a period of time in the beginning where the payment is one amount, then over time it changes. Interest-only loans have a period in the beginning of the term of the loan, usually five or 10 years when the full amount of payments consists of interest only, after which the entire principal must be paid back, spread out over the remaining term of the loan.

When payments change from interest to principal, they will typically increase significantly, and if you have this type of mortgage, now is the time to look at refinancing.