How a down economy can affect refinancing
One of the more popular and enduring questions, almost reaching metaphysical status, is when is the right time to refinance a home mortgage? Like many other metaphysical questions, the answer varies with the person, circumstances, and other conditions.
This question requests universal answers that simply don't exist. In the midst of a down economy, decisions to refinance or not to refinance become even more perplexing.
All mortgage loan veterans would agree that a down economy affects refinance decisions significantly. As hard as humans might try to live in the past or in the future, they all must live their lives in the now. Deciding whether now is the right time to refinance is much more complex in a down economy.
Typical conditions in a down economy that affect refinance decisions include depressed fair market values (FMVs), fewer borrowing options, tighter credit rules, and increased scrutiny of applicants' income and expense declarations. In many cases, interest rates escalate if inflation is part of the down economy equation. This further complicates the refinance now or later questions.
Throughout history down economies and recessions were caused or at least accompanied by high loan interest rates. During the famous recession of the early 1980s, home loan interest rates were at record high levels.
Even when interest rates are reasonable, the lack of job security and reduced incomes generate home loan issues (tighter credit rules, depressed real estate values, etc.) that hurt the refinance market. The down economy of 2009 is merely another example of this unfortunate close relationship with home loan refinances.
How to determine the right time to refinance
While the goal of every home buyer and owner is to get the best home loan for the then current conditions and the long-term future, economic changes, either personal or global, generate the need to consider refinancing at various times.
Deciding on the right time to refinance is a function of many factors. Here are some suggestions to help you determine when the proper conditions exist to encourage a refinancing decision.
Interest rates are low
While this might appear to be an easy rule of thumb, it is not as simple as it first appears. First, how do you define "low". A historic rule of thumb no longer applies, but still enjoys large popularity.
This formerly valid theory states that a homeowner should refinance only when they can get a new home loan that is at least 2% lower than their current mortgage. The variety of creative home loan offers available should be analyzed for their overall benefits, e.g. lower points, closing costs, and terms, to help decide whether a refinance is justified.
Recommended resource: Refinance interest savings calculator
Long-term considerations vs. short-term benefits
Many homeowners understand the fundamental truth that all of us must live in the "now" since that is all that really exists. The past has already occurred and cannot be altered, and the future has yet to exist. However, when considering mortgage loan choices, living only in the now can be expensive.
For example, a below market start rate for an adjustable rate mortgage (ARM) that might escalate to stratospheric levels in the future might be a poor choice. Always consider and evaluate the long-term pros and cons of refinancing at the terms being offered.
Timing is everything
Fortunes, careers, legends, and other noteworthy accomplishments have often been made or destroyed by the simple condition of good or bad timing. In a way, refinancing decisions often fall into this historic and fateful category.
Unlike a home purchase decision, a refinancing choice is much more in the control of the borrower. Refinance now, later, or never is your choice and no one else's.
The best timing is a relative decision. Is it when rates are lowest? When you need better terms? Just prior to a change in employment or cash flow conditions?
Growth economies or recession conditions typically don't dictate the best timing for refinances. Your personal financial condition is more important to generating a yes or no decision for refinancing.
Weigh the benefits
Refinancing or not refinancing an owner-occupied home is a contradictory process. On one hand, it should be a pure business decision. Will you save money, short- and long-term, or not?
Will new home loan terms be more favorable to you or not? Will a refinance help you manage your total personal budget more effectively or further complicate your economic life?
Yet, your home is as much emotional as it is business. This complicates and clouds some decisions. Deciding when to refinance is as much a personal decision as it is a business or economic choice.
Recommended resource: Compare refinance rates
