The Federal Reserve announced this week that they were cutting interest rates offered to banks to almost zero. The hope is that low rates in the current struggling economic times will encourage both lenders and borrowers. In response, interest rates for mortgages have fallen this week to the lowest point since 1971. Just over 5.1 percent was where the average fixed rate 30 year mortgage hovered. It was the seventh continuous week that interest rates dropped. The drop in rates has encouraged many current homeowners to apply for mortgage refinancing. Rates may be low, but banks are also not approving applications as readily as they were in the past. Their lending practices have become much stricter, as a result of the upheaval in the credit market this past year. So although there has been an increase in mortgage refinancing applications, many of those are being denied.
Lenders are being very cautious in the current economic climate, regardless of the rates. Banks are requiring higher credit scores and scrutinizing credit histories more than ever before. To secure mortgage refinancing, a consumer must have a higher credit score than was required for a loan for the same amount just a year ago. In addition, home values have decreased strikingly in most markets across the U.S. That means that those homeowners now have less equity in their homes. A required step in mortgage refinancing is a current appraisal of the property. When those appraisals are done, some consumers are told that their properties are worth less than their mortgages now. Obtaining approval for mortgage refinancing will be challenging for those homeowners. In spite of the new lending restrictions, there are many consumers who will still meet the criteria for mortgage refinancing. If you are considering refinancing, analyze your budget and financial plan to figure out if now is the time to do it. First, add up all the fees and costs of refinancing. For example, sum up your estimates for costs of attorney hours, appraisers and document filing. Make sure to include any penalty fees for paying your original mortgage off early. Then, subtract the new monthly payment from what your current payment is to know how much you would save each month. Thirdly, calculate how many months it will take to actually start saving (know as your "break even" date), by taking the cost of the refinancing and dividing it by your monthly savings. The last step is to estimate when you plan to sell the house. If it is longer than when your break even point would be, then mortgage refinancing would be a good decision. Related Information Equity loans .