Is Mortgage Refinancing the Right Step for You?

The main reason for considering the refinancing of your mortgage is to reduce the payments due to a drop in interest rates. Interest rates have been at or near historical lows for some time now, with little change, so you probably have already taken advantage of this step if your bought you home some years ago when interest rates were much higher.

However, let's review the considerations in mortgage refinancing. 

• You may refinance your mortgage with the existing lender, or you may go to another lending institution.
• In the refinancing prossess, you pay off the first loan by getting a new loan.  Make sure you have no prepayment penalties on your original loan.
• When you get the new loan, you will incur most of the same "closing costs", or settlement charges as when you got your original mortgage.  Let's say that these charges could be up to $5,000 and are payable at closing.  You may be better off using that money to pay down the principal balance of your existing loan, shortening the term by years and saving perhaps $10,000 in interest if you are in the first half of your mortgage term.
• How long do you expect to live in your home?  Rule of thumb in refinancing is that a reduction of 2-3% in interest rate, offset by the settlement charges, will begin to save you money within 3-4 years.  Do the math to make sure this is a financially sound decision.
• You will need all the same documentation as when you applied for the first mortgage.  See our Reference Library article entitled "Mortgage Preparation Checklist" to make sure you have all the documents ready.
• Get your own Credit Scores before applying for any loans.  See our Reference Library article entitled "Protect your Credit" for all the information you need. 

Interest rates are near historical lows.  If you have not yet taken advantage of refinancing your mortgage, now is the time to do it.  Interest rates only have one way to go -- higher!