Is Now The Time To Refinance Your Mortgage?

It doesn't matter whether you've been a homeowner for two or ten years, at some point you may consider refinancing your mortgage loan if interest rates go down. If you've never been through the refinancing process before there a few simple things you need to know before you can decide if refinancing makes financial sense for you.

When you make the decision to refinance it's important to remember that you're applying for a new loan. It doesn't matter if you use the same or a different lender you will still have to jump though all of the same hoops as you did on the original mortgage. That includes complete documentation and verification of your income, debt to income ratio, credit history and work history. Not only do you have to qualify for the new loan but your home has to appraise at a value high enough to support the loan. And refinancing costs money! Closing costs may vary by geographical location but on average come in at around 2% to 3% of the loan value. Even those "no cost" loans will cost you in terms of a higher interest rate, points or a higher loan balance. If the goal of refinancing is to lower your monthly payments this simple calculation can help you determine how long it will take you to recover the cost of refinancing. For example, if your costs are $5000 and your saving $250 a month it will take you 20 months to begin to see real savings.

For most people, the decision to refinance is made because interest rates have fallen. With lower rates come lower mortgage payments. Others decide to "cash out" equity to pay down high interest credit card debt or to make needed home improvements. Refinancing can also be a great idea if you're interested in lowering your loan term from 30 years to 10, 15 or 20 years. You can pay off the loan faster but keep in mind that payments will probably be higher due to the shorter timeframe.

If your current mortgage is a 30 year fixed rate loan it pays to carefully evaluate whether it makes sense to refinance for another 30 years or go for a shorter term loan. It typically doesn't make sense to refinance early in a loan period because most of your payment goes to pay down the interest. If you've been paying for over 8 or nine years, more of your monthly payment has gone toward reducing your loan balance. However, by extending the loan for an additional 30 years, you could end up paying interest for a much longer time. If the goal is to pay off the loan quicker, you should look at all of the term choices available along with the mortgage payments. That is where the loan officer comes in. Your mortgage professional can walk you through all of your options to help you make the decision that is right for you.