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.
