Mortgage rates sank to their lowest level recently. The averages for 30-year fixed rate mortgages, 15-year and five-year mortgages hit their lows.
So what does hitting the lowest rate mean? It simply means cheap loans for those who are planning to borrow money through a home loan.
But what about those with existing mortgage, can they enjoy these cheap interest rates? Most likely, many mortgagor are having fixed rate mortgages or having the adjustable rate mortgages that are still in the lock period.
Fixed rate mortgages have their rates fixed for the lifespan whereas adjustable rate mortgages have interest rates locked for a certain period after which they are adjusted to the prevailing market rates. Fixed rate mortgages free the borrower from having to keep track of the interest rate movements. It eliminates the anxiety of rising interests that goes with the adjustable rates.
As market condition changes, the interest rates move either upward or downward. When the rate is locked as in the case of fixed rate loans, the lender loses the opportunity of gaining more from increases in the interest rates while the borrower enjoys the security of paying the same rates even if the prevailing interest rates in the market are rising. On the other hand, when the interests rates are declining, it is the lender that enjoys the privilege of collecting the same interest amount for the loan while the borrower could not do anything but repay the loan at the agreed fixed rate even if the prevailing rates are decreasing.
However, most fixed rate loans have provisions for options to refinance the loan in case the interest rates go significantly lower than the fixed rate. The mortgagors are therefore not totally denied to enjoy the privilege of availing the lowest mortgage rate.
With the interest rates hitting their lowest level, applications for refinancing is flooding the financial institutions. Refinancing is making a new mortgage, usually but not necessarily from a different lender, in order to pay off the balance of an existing loan which carries a higher interest and in effect enjoy the lowest rate being applied to the new mortgage.
The term of the new contract may not necessarily be equal to the remaining life of the existing loan. The borrower may choose to shorten or extend the term of the new mortgage depending on his new capability to pay the monthly repayment amount. The borrower may also choose to have a different type of loan which he sees as more affordable and economical to him.
The consideration for application to refinance existing mortgages now that the mortgage rate is lowest depends upon the terms and conditions of that you have. If the difference in interest rates is significant then it may be worth considering. Bear in mind that applying for new mortgages, as in the case of refinancing, involves additional cost in processing. Your existing loan may also require a closing fee if the loan is paid before its term ends. These and other variable costs should be considered in deciding whether or not to refinance your existing mortgage in order to benefit from the lowest mortgage rate.
By Martin Fisher