Should You Refinance Your Mortgage?
Dear Carrie: With interest rates dropping, I'm thinking of refinancing my mortgage. What do I need to know? -- A Reader
Dear Reader: Interest rates are on a lot of people's minds these days. For savers, rising interest rates are a plus, but borrowers benefit more when interest rates are low. For homebuyers and existing homeowners with a mortgage, lower interest rates can mean saving thousands in interest charges. But whether it makes sense to refinance your own mortgage depends on several factors.
What kind of mortgage do you have?
There are two basic types of mortgages: fixed and variable.
-- A fixed-rate mortgage locks in both your interest rate and monthly payments for the life of your loan.
-- An adjustable-rate mortgage (ARM) is a hybrid with a fixed interest rate for a specified initial term -- say, five years -- after which the interest rate may reset or fluctuate, typically depending on prevailing interest rates.
Changes in interest rates affect fixed and adjustable mortgages differently. While adjustable-rate mortgages may be affected by short-term rate changes, fixed mortgage rates tend to be more closely aligned with the 10-year Treasury note.
Therefore, if you have an ARM, a decrease in the short-term federal funds rate may lower your rate. If you have a fixed-rate mortgage, you should instead pay attention to long-term bonds like the 10-year Treasury note.
Although these rates are related, they aren't the same and can act differently from one another. Sometimes they may both decrease or increase. Or one may go up while the other goes down.
Bottom line, pay attention. When rates decline, you may have an opportunity to refinance either your fixed or adjustable mortgage at a lower rate.