Refinancing Your Home Mortgage - When should you refinance?

Refinancing Your Home Mortgage

      Other Mortgage articles:

           - Choosing a Mortgage
           - Types of Mortgages
           - What are Mortgage Points?
           - Refinancing

What is Refinancing?

Refinancing is the process of getting a new mortgage for your home. You basically get a new loan and use that one to pay off your old loan. Typically the refinancing or mortgage company together with the real estate lawyer will do a lot of the work for you. You will usually go to a mortgage closing at the lawyers just like you did with your first loan. You often still have to pay a lot of the closing costs like you did with your first loan, but sometimes these may be all or partially covered by the mortgage company because they want your business.

Why Refinance my mortgage?

People refinance for various reasons. Usually people refinance because interest rates have dropped below the rate of their current mortgage interest rate. By refinancing they can get a lower monthly payment. Some people refinance because they want to get equity or cash out of their home. When the value of a house rises, you can get a bigger loan, so by refinancing, people can get the value that their home as risen in cash. Refinancing to get equity out of your home can be dangerous. If the home value drops, you could end up under water or owing more than your house is worth. This happened to people in the recent housing bubble burst and makes it very difficult to sell your home. As a result, we recommend you consider refinancing carefully when doing it to get home equity.

When should I Refinance my mortgage?

There are several rules of thumb out there for when you should consider refinancing. One is that the interest rates should be 2 points below your current rate. However, you need to consider all the factors and every situation is different. Factors to consider include: how long you plan to be in your home, what type of loan you have and if want to switch to a different type of mortgage, how much lower current interest rates are, how much closing costs are, etc.

The simplest refinancing example is when you have a fixed mortgage and you want to get the same type of fixed mortgage at a lower rate. The main factors to consider would be the interest rate, the closing costs, and how long you plan to keep the new mortgage. For example, lets assume that by refinancing you can save $100 per month off your monthly payment. Now lets say the closing costs are $2400. You would need to stay with that current mortgage for 2 years before you broke even on the refinancing.

Another consideration is to refinance to get out of an upcoming balloon payment or a raise in rates from an ARM mortgage. As you near a balloon payment or the end of the fixed period on an ARM mortgage, it's a good idea to keep an eye on interest rates and look to refinance when it makes sense for you financially.

In some cases you will see mortgage refinancing ads that push "no closing costs". Keep in mind that there are always closing costs with a mortgage. Nothing is free. What the lender is doing in this hiding the closing cost either by letting you finance them (bigger loan) or by a higher interest rate. There's nothing wrong with either of these methods, but you should understand and consider them when quoting various mortgage brokers and when deciding on whether you should refinance or not.

As always, be sure to shop interest rates, discount points, and closing costs with multiple reputable mortgage lenders.

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Other Mortgage articles:

           Choosing a Mortgage
           Types of Mortgages
           What are Mortgage Points?
           Refinancing