Thursday, September 21, 2006

Mortgage Refinancing

Uncertainty about the future course of interest rates also affects the refinancing decision. Seemingly, a homeowner should refinance whenever mortgage interest rates drop enough to generate a positive net saving on interest costs within a reasonable period of time. However, the timing of this decision is important because, if interest rates continue to fall, the homeowner will reap even larger savings by waiting to refinance.

The most that could be lost in the event of rising rates would be the relatively small savings currently available--a large rise in rates would have no more adverse effect than a small rise in rates.

The situation is different if the homeowner has an adjustable-rate mortgage; in that case, the prospect of rising rates creates a greater incentive to refinance because it is possible for the rate on the existing mortgage to adjust to some level above the current one.

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