Should you refinance your mortgage?

by Rena Sandou

The decision to refinance requires much more than simply considering a lower interest rate. Although, currently, mortgage rates are so low that you could almost refinance for free, refinancing isn’t free. There are a lot of fees associated to this decision such as bank fees, appraisal and inspection fees, lawyer fees and so on, that, at the end of the day, the mortgage rate is the least you should care about.

Why refinancing?

When you consider refinancing, your aim is to restructure your mortgage at a lower interest rate and under a different loan term than your original mortgage.

Your first goal is to reduce your monthly payments by refinancing your mortgage at a lower interest rate. Most homeowners take advantage of the current mortgage rates and refinance. According to Barbara Corcoran, the real estate mogul, refinance applications have tripled in 2009 and the number of applications getting approved is considerably higher than ever. Of course, this doesn’t mean that lower mortgage rates are the panacea to all the problems of the real estate market. However, it allows homeowners to survive until home prices skyrocket again.

Secondly, many homeowners appreciate the fact that by refinancing they are able to spread their mortgage over another 15 to 30 years depending on the terms agreed. For instance, if you have already been paying your 30-years mortgage for nine years, you have twenty one years left on your mortgage. By refinancing, you can spread you loan over another 30 years maximum and reduce your monthly payments by extending your mortgage over another nine years to pay back the same amount of money.

Consolidating your debt is another reason for considering refinancing. For instance, if you have your original mortgage and a home equity mortgage, you may combine the two mortgages into one fixed-rate mortgage and level out the payment over the loan term.

When is the best time to refinance?

Now that you know why to refinance, you should be able to consider when the best timing to get a new mortgage is.

Typically, you need to spend several years in the house for refinancing to be beneficial. So, refinancing makes sense after 5 years at least.

Another consideration is whether you are refinancing your ARM to a fixed rate. Again, how much time you have stayed in your house is important. For instance, if you have stayed less than 10 years, it doesn’t make sense to refinance your ARM to a fixed rate mortgage  (FRM) because in such a short period refinancing will incur expenses that will cause your ARM to lose much of its value. Instead, if you plan on staying at the house more than 20 years, refinancing your ARM to a FRM will save you a lot of money over the life of the mortgage.

No matter what your final decision will be, you should refinance only one on your current mortgage. Multiple refinancing can diminish your overall financial benefit because by migrating to the next low mortgage rate you will be leaving a trail of closing costs.