Introduction to Refinancing
Refinancing involves paying off your current mortgage and replacing
it with a new mortgage. It often involves many of the same steps
and expenses that were required when the original mortgage was
obtained.
The
most common reason to refinance is to lower monthly mortgage
payments, but there are other reasons to consider refinancing.
Please read the "Reasons to Refinance" and "Should
You Refinance?" pages.
Reasons to Refinance
Lower the Monthly Payment: If interest rates have dropped, refinancing
may lower your mortgage payment. This is the primary reason
people refinance.
Reduce the Term (Length) of the Mortgage: A drop
in interest rates may allow you to shorten the amount of time
you pay the mortgage but leave the mortgage payment about the
same.
Reduce the Risk on an Adjustable Rate Mortgage
(ARM): An ARM mortgage may have enabled you to afford your home
but if the interest rate has increased significantly, evaluate
a fixed rate alternative. The risk of further interest rate
increases is then eliminated.
Use the Home's Equity: As an alternative to a
home equity loan, you may elect to refinance your home for an
amount greater than the remaining balance of your mortgage.
This is known as a "cash out" loan.
Consolidate Debts: An owner with outstanding
loans or credit card balances that have high interest rates
can consolidate these loans into one new mortgage.
Should You Refinance?
To refinance or not depends on your own personal financial situation.
There are many mortgage options available so make sure to carefully
examine each option. Also, remember that the best option may
be to do nothing at all.
Points to consider:
Do I have the funds that refinancing may require
to cover up-front costs and fees?
Refinancing your mortgage may require you to pay a large amount
of money to cover up-front costs and fees. If you do not have
enough money to pay the up-front costs completely it may be
possible to finance some of the costs by including them into
the new mortgage.
How long until I recover the costs of refinancing?
The rule of thumb is the refinancing costs are recovered within
2-3 years. So, if you plan to sell the house or pay it off shortly,
you may not want to refinance because you will not recover the
costs. Obviously, this depends on the up-front costs and the
savings with the new mortgage.
Has my income increased substantially?
If your income has increased substantially, you may be able
to afford higher monthly payments. This may allow you to shorten
the term of your mortgage. If the available interest rate is
lower for the shorter term mortgage, refinancing is a good option.
Otherwise, simply make larger principal payments against your
current mortgage.
Is the current loan an Adjustable Rate Mortgage (ARM)
If the current rates for a fixed rate mortgage are the same
or slightly higher than your ARM, refinancing may make sense.
If the fixed rate is lower than they are expected to be when
your ARM converts to a fixed rate, it may make sense to refinance.
Obviously, much thought needs to go into the refinancing decision.
Also, you should evaluate this decision regularly to account
for changes both in your financial situation and the economy.
Perhaps, the decision is not to refinance now, but a few years
from now it may save you thousands of dollars.
