Solomon & Hoover CPAs, PLLC Blog

In September, the Federal Reserve announced plans to keep the Fed funds rate at “exceptionally low levels” at least through mid-2015. So if you haven’t already refinanced your mortgage, you probably have time to weigh the decision.

Low rates are just one consideration. You also need to answer the following questions:

 1.      How’s your credit? Credit standards have tightened dramatically. To refinance — and qualify for the best rates — you’ll likely need an excellent credit score.

2.      What’s your equity? To qualify for the best rates, you generally must have equity in your home of at least 20%. If your home’s value has dropped, you may need to make a lump-sum payment toward equity. And if you’re “under water” — you owe more on your mortgage than your home is worth — you may not qualify for refinancing at all.

3.      How long do you expect to be in your home? Refinancing can lower your monthly mortgage costs, perhaps significantly, and the longer you remain in your home, the greater your overall savings. So if you move in the near term, you might not realize much benefit after you take into account closing costs — averaging more than $3,700 nationally on a $200,000 mortgage, according to a Bankrate.com survey.

4.      What’s your mortgage rate? The lower your current rate, the less room you’ll have to reduce your payments by refinancing, and the longer it will take to make back the closing costs.

5.      Is your mortgage rate adjustable? Adjustable rate mortgages can be risky because, when inflation rises, your mortgage rate will reset significantly higher. So you might benefit from refinancing to a fixed-rate loan, perhaps paying slightly more in the near term but locking in a historically low rate over the longer run.

6.      How long have you had your mortgage? Refinancing restarts your debt clock. Weigh the benefits of lower monthly payments against the costs of starting from scratch with a new mortgage.

Alternatively, low interest rates might enable you to reduce your mortgage length — for example, by moving from a 30- to a 20-year mortgage. This may mean the same or slightly higher current payments, but it will allow you to substantially reduce your interest costs over the loan’s life.

© 2012 Michele M. Hoover, CPA. Alexander & Hoover, P.A., Certified Public Accountants, specializes in providing a wide range of diversified accounting, tax, finance, and consulting services to individuals and businesses.