A Few General Tips to Help You Decide Whether to Refinance

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Thanks to an announcement by the Federal Reserve in mid-September that it would buy $40 billion of mortgage-backed securities per month, interest rates have been falling steadily and are now at historic lows.

Bloomberg News reported yesterday that Freddie Mac's average rate for a 30-year fixed loan fell to 3.4 percent for the week, from 3.49 percent, the lowest rate since 1971, and the average 15-year rate fell to 2.73 percent from 2.77 percent, also a record.

Many people are using the new low interest rates to refinance their mortgages. The week following the Fed's announcement, the Mortgage Bankers Association reported that refinancings accounted for 81 percent of total applications.

So...does it make sense for you to refinance your home? Low interest rates are important but it's also critical to take into account the amount of time you plan to hold onto the mortgage, to offset refinancing costs. Generally, sources agree that you should plan to stay put for at least two to three years following a refinancing.

If the interest rate offered is two percentage points lower than your current rate, common wisdom recommends refinancing. Do you currently have an adjustable rate mortgage? You may want to opt for a fixed rate mortgage to avoid rising interest rates. Another good reason to refinance is to change the terms of your loan to either pay off your mortgage more quickly and avoid costly interest payments; or to extend the length of your loan in order to free up cash now ̶ those dollars can be used to pay off high-interest credit card or other debt, though you'll pay more for your mortgage in long the run.

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