No, it isn’t always best to refinance to a lower interest rate! It really depends on your situation. For one thing, if you’ve made payments on a loan for several years you might be better off to keep paying on that marginally higher interest rate loan due to the fact that as a loan ages your are paying more toward principle and less toward interest. If you refinance, almost all of the initial payments will go toward interest and hardly anything toward the principle. That’s just the way amortization works. Therefor it might make more sense to keep the mature loan since you are paying down the loan balance to a much greater degree.
Another point to consider is, if the loan you are refinancing is the original loan you obtained when you purchased your property and you now refinance into a newer lower rate loan, that newly refinanced loan becomes a recourse loan. That means that if you default on this newly refinanced loan at any time, the lender can obtain a deficiency judgment against you for any unpaid balance. On the original purchase money loan there is no possibility of a deficiency judgment and the property is the only recourse that the lender has.
The other consideration is do you have a fixed rate loan or a traditional ARM-Adjustable Rate Loan? Many conservative consumers like myself feel more secure with a fixed rate loan. But a fixed rate loan doesn’t always mean that your mortgage rates will be lower than an ARM loan over the length of ownership of any given property. Historically, ARM’s have resulted in lower overall interest costs compared to fixed rate loans particularly in a low interest rate environment as we are currently experiencing.
Option ARM’s on the hand most likely should be refinanced due to the fact, that many of these loans usually provide lower than market interest rates for the first few years and then adjust upward in increments larger than most consumers feel comfortable with. Also, many consumers choose or OPTION to make payments on these loans that are actually lower than the interest rate necessary to carry the loan and accrue or increase their loan balances commonly know as negative amortization.
There is no one size fits all when it comes to refinancing. Each refinance should be determined on a case by case basis.
