Refinancing Your Mortgage is Still Worth a Look

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Home ownership, the American Dream! If you own your home, you, and the roughly 87 million other homeowners like you, probably also have a mortgage. 

When you bought your house, much of the angst and analysis was around the house itself and the general affordability and you probably didn't give a whole lot of thought to the specifics and mechanics of your mortgage. You just did what you had to do to get into the home of your dreams.

But, now that you've lived in that house for a few years and things have settled, you may have gone back and looked at that mortgage and the interest rate and some of the stipulations and provisions that you so fervently signed off on in the lawyer's office, and wondered if it makes sense to refinance. It very well might.

You may have heard on the news or your favorite blog that interest rates are rising. That's true, interest rates have ticked upwards over the past year and the indication from the Federal Reserve, the government institution that has significant control over the interest rates, is that they will likely continue to increase rates over the short to medium term. So yes, interest rates have risen and are likely to go higher, but that doesn't mean that anyone looking to refinance their mortgage is out of luck. There are still many situations where refinancing can make sense.

Every family has unique circumstances and the dimensions that you need to consider to determine if it makes sense to refinance are quite complex, but here is some general guidance to consider.

1. If you're someone who hasn't refinanced yet

Refinancing Your Mortgage

If you have a mortgage that you took out eight or more years ago and haven't refinanced since, you will probably find the rates available today are lower than the rates you originally financed at. It's worth a look. Rates now are in the low 4% range, so if your mortgage is 4.5% or higher, whenever you obtained it, it's possible that refinancing might make sense.

2. If you're someone paying mortgage insurance

Different states have different names for it, but mortgage insurance, commonly called PMI or private mortgage insurance might be part of your bill. If you didn't put down a large enough down payment, your bank may have required that you buy it. Eliminating that insurance payment is a direct saving to you, and with a lower principal balance and a new 30-year term, your payment may even go down. If the current rate is much higher than your existing interest rate, however, then it may be best to simply wait and remove the payment once you've hit the equity threshold.

3. If you are substantially better off financially than when you bought the house

Those early years may have been lean financially, and it may have seemed daunting to make that monthly mortgage payment. However, if your circumstances have improved significantly, refinancing from a 30-year mortgage to a 15 year or even 20-year mortgage can make sense if you can afford it. The rates for 15-year mortgages right now are in the low 3% range. So this can be a real compelling strategy. If you have a rate in the 4% range and you can drop to the 3% range, you'll pay significantly less interest over the course of the loan and you'll be done paying it much sooner so you can redirect the funds to other priorities such as college or retirement. Now, even with the lower rate, your payment will likely go up because of the shorter term, thus the need to be in a better place financially.

4. If you are in an adjustable rate or interest only mortgage.

If when you got your mortgage, you chose an adjustable rate or interest only mortgage for the incredibly low rate, for the flexibility or maybe because you didn't really understand how they work, now is a good time to evaluate if it still makes sense. Rates are historically low right now and given the upward trend, now seems like a really good time to lock in a more predictable payment for the term of the loan rather than worrying about it every year or a big balloon payment at the end.

5. If you can find a provider that offers a “no points, “no closing costs” loan

Refinancing Your Mortgage

If you search locally or even nationally, you may be able to find a provider that offers a “no points, “no closing costs” loan. The basic math of refinancing is typically how much savings you get from the reduced rate compared with how much you pay in points and closing costs. Simply divide the closing costs and points by the monthly savings and you get the “payback period”.

6. If you need to “restructure” some aspect of your finances

One must be very careful when using your home as a borrowing tool or as a source for cash, but in some cases it can make sense. What you have to be particularly vigilant about is not falling for the “lower payment” bait. Going from 20 years of payments left on your current mortgage to 30 more years on a new mortgage may lower your payment, but now you've extended your liability for 10 years! If you are doing that intentionally, OK, but you must really understand the trade-offs. Similar considerations apply when considering refinancing with “cash out” to help pay college expenses. If doing so jeopardizes your retirement, I would strongly recommend a further and detailed evaluation.

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In all your assessments and calculations, don't forget to consider the loan term. Think about how many years you have left in your current situation and when you'll be done and comapre that with the new loan length and new loan rate and consider if it is worth it.

If after considering all the factors, you decide that refinancing does make sense, remember too that you'll likely have to be very prompt with all of the documentation requests from your lender, so doing a bit of organizing and chasing down tax and income paperwork in advance will help you avoid any last minute headaches.