History

• Prior to the creation of the Federal Housing Administration (FHA) in 1934, most home mortgages required 50 percent down and were for no more than five years. Few individuals could qualify for such difficult terms. FHA-backed loans with a fixed interest rate spread over a 30 year period provided borrowers with more attractive interest rates and payments they could afford, resulting in a marked increase in home ownership. Since the 1930s, numerous new mortgage products have come on market including adjustable rate mortgages (ARM).
  
  

Significance

• Fixed rate mortgages provide homeowners with the benefits of knowing exactly how much they will be paying for their house payment each month, along with the security of knowing this payment will never increase for the life of the loan. Adjustable rate mortgages typically have the advantage of starting out at a much lower interest rate, and a commensurately lower monthly payment, which allows consumers to mortgage a much larger amount.
  
  

Effects

• Prevailing interest rates may drop in the open market, leaving homeowners with a fixed interest rate paying more for their mortgage than those who purchased a home while the rates were lower. These homeowners may secure a lower interest rate and save money both on monthly payments and in total payments by refinancing their mortgage. Prevailing interest rates may rise, triggering an automatic increase in the interest rate charged on an ARM. Homeowners may lock in a lower fixed interest rate by refinancing their mortgage.
  
  

Considerations

• Most mortgage and finance companies charge fees called closing costs to refinance a home. These fees may include points, attorney fees, title search expenses, local tax and transfer fees, appraisal fees and others. Homeowners must determine whether the savings in interest will offset the cost of obtaining a refinance. Finance expert, Dave Ramsey, suggests only refinancing a mortgage if the interest rate will be reduced by at least two percent.
  
  

Time Frame

• The best time to refinance a home varies based on the needs and desires of the homeowner, and there is no one-size-fits-all answer. According to the Motley Fool investment service, homeowners should consider how long they will have to remain in their home in order to recoup their expenses for obtaining the refinance. Homeowners should also consider whether there are any prepayment penalties and whether they wish to decrease their payments or maintain the same level of payments in order to pay off the mortgage sooner.