Should I Refinance My Home Mortgage?

A Home Buying Article Contributed by Elizabeth Fox-Wise

Whether or Not to Refinance Your Mortgage Can Be a Tough Question

Home owners are often confused as to whether it would be a good decision to refinance their mortgage or not. Understandably so; as there is a lot to consider before choosing to take a refinance mortgage.

In the 2000s, mortgage interest rates have dropped several times; and this year mortgage rates have hit an all time low. Causing many owners to consider taking a refinance mortgage. As a matter of fact, studies from the year 2001 have determined that more than half of the home mortgages taken out that year were refinance mortgages.

Before deciding to refinance your mortgage, you should be aware of a few things.

Applying for a Refinance Mortgage is Just Like Applying for a First Mortgage

If you refinance your mortgage you are basically applying for a new mortgage on your home the same way that you did the first time your mortgaged it. Therefore, you will have to go through the same application process and qualifications.

Additionally, you will incur the same expenses that you did the first time you mortgaged the home. This includes paying for an appraisal on your home, paying closing costs, other fees and points.

Points are a fee that the mortgage applicant pays to the mortgage lender when they get the mortgage. One point is equal to one percent of your refinance mortgage total. Points and interest rates tend to have a inverted relationship. That is to say that the lower the interest rate you get the more points you have to pay and the less points you pay the higher the interest rate usually is. Points must be paid up front at the time of closing.

Occasionally you can find a refinance mortgage being offered with no points and no closing fees. These expenses are paid for by the lender. However, these refinance mortgages are typically at higher interest rates.

So How Do You Know If It is Worth It to Take a Refinance Mortgage?

It is always a good idea to meet with an accountant if you are considering refinancing your mortgage. However, the general rule of thumb for determining if it is worth it to refinance your mortgage is that you want to see an interest rate reduction of at least 5/8%. Anything lower than that is typically not going to save you enough money to be worth the mortgage refinance costs.

You will need to compare the costs of refinance to the savings on your mortgage, and determine how long it will take for your savings to recoup your expenses. Another thing you will need to consider is how long you intent to stay in your home. Say for example that the mortgage refinance will cost you a total of $2,000 and you can expect to see a monthly saving of $48 on your mortgage payment.

Quick calculations tell us that it will take you 42 months (3 years and 5 months)of mortgage payments to recover the $2,000 that the refinance mortgage cost you. If you plan to stay in your home for another thirty years the refinance mortgage is probably a good idea. If however you plan on selling the home in a few years, it probably is not a good idea to refinance the mortgage.