Should I Refinance?

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by: marciafreeman
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Many consumers are considering refinancing their mortgages, but some do not thoroughly think through the process before jumping in. When you refinance, you apply for a new mortgage to replace the old one. Borrowers typically refinance to obtain a lower interest rate or change the term on the original loan. Term refers to when the loan matures. The most common term is 30 years. Your credit will be given the same scrutiny as it was by the bank the first time, and you will need to have an updated appraisal done on the property. The home appraisal allows the lender to assess the value of the property now. Your credit score and credit report will be requested, as well as any information on additional mortgages on the home. If approved for the new mortgage, you may go through the same process you did when you bought the house, but there is often less paperwork with a refinance. When you refinance, the new loan will be used to pay off the old mortgage and any additional loans against the house. You will be responsible for all fees for titling, preparation of documents, lawyer costs, etc., just like you were when you received the original mortgage.

Most homeowners who refinance choose to do so because interest rates have decreased significantly compared to the current mortgage. When deciding if you should refinance your mortgage, you should first determine the savings you would incur over the life of the loan by using the old interest rate versus the new. Then, compute the cost of the fees and expenses incurred by applying for and obtaining the new mortgage. Make sure you include any penalty fees for paying off the original loan early, if applicable. Lastly, determine how long you intend to keep the property. Say the new rates are at 5 percent and your current mortgage is 7.5 percent, you could save thousands of dollars over the next 7 years you plan to own that property. If the fees to refinance will only cost $1000, for example, it would be worth it. If you plan to sell in two years, though, it may not be worth the cost of the refinance.

The refinance of a mortgage can lower your monthly mortgage payments, making it easier to make those payments on time. You can sustain your good credit, because your monthly payments will be more manageable and more likely to be paid in full. Before jumping into any refinance, do the calculations to see if the savings over the time you plan to hold the mortgage will be greater than the costs of the refinance.

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