There are several reasons to refinance your home including lowering your mortgage interest rate, reducing your monthly payments, and tapping into your home's equity.
Although these are all excellent reasons to refinance, there are some things that you should consider. The process of refinancing is similar to the process that you went through when through when you first applied for your mortgage including an application, credit check, new survey, title search and appraisal and inspection fees. All of this will have to be considered when you are determining whether or not it makes sense to go thourgh with it.
Even with the added costs, it usually makes sense to refinance if you can get an interest rate that is at least two percentage points below what you are currently paying. However, that's just a rule of thumb and your situation may be different.
Before you make the decision to refinance you should ask yourself these questions:
How much will this lower my monthly payment?
How much will I have to pay in refinance and closing costs?
Will I stay in this house long enough to recover these costs through the reduced payments?
Next you need to calculate how much you still owe on your current mortgage, how much you paid when you bought the home, how much you're paying each month, and how much you initially paid for the house. Armed with this information you can calculate what your break-even point is and at what point you actually start to save money.
If you have an Adjustable Rate Mortgage (ARM) then you should also consider whether your next interest rate adjustment is going to increase your payments significantly and if the new interest rate will be rising by two points or more. If none of those conditions are true then it might not be the right time to refinance.
If your current mortgage has a cap on your monthly payments, are those payments big enough to pay off your balance by the end of the original loan term? Will refinancing a new ARM or a fixed-rate mortgage let you pay your loan in full by the end of the term?
While all of this research sounds like a lot of work, it's worth the effort if you obtained your mortgage when interest rates were a lot higher, or you did not have as good credit as you do now, or you were not able to put down a large down payment when you first got your mortgage.
All of those issues can change what you will pay when you refinance. You might simply want to change your fixed mortgage to a variable one, or the other way around.
A good place to begin the refinance process is with your current mortgage lender since the mortgage industry is highly competitive and it's likely that your lender doesn't want to lose your business.
Just call and say that you are interested in seeing what your refinance options are. Just mentioning the fact that you're going to be looking will probably result in your being offered the best plans and rates that your lender currently has and that you qualify for.
If you didn't put down 20% when you first bought your home then you are probably paying PMI insurance which can run as high as 10% of your payments each month. When you refinance you usually find that your equity has grown to the point where you no longer need to pay the PMI and that drops your payments significantly.
Looking into refinance options is a sensible thing to do if you were penalized on your first mortgage because your credit history was less than perfect. Chances are that your credit score resulted in your interest rates being higher because your loan was placed with a sub prime lender that charges higher rates to make up for the increased risk that your credit history represented. If you've established yourself on your current mortgage by keeping your payments current then you have become less of a credit risk.
Debt consolidation is one of the leading reasons the reason many people refinance. If you've got a large amount of personal loan or credit card debt then you are likely paying a lot of high interest rates and the total of your monthly payments is more that you would pay if you rolled them all into one.
And finally, a mortgage refinance is a great way to tap into your home's equity for what amounts to a low interest cash loan that you can use to send a child to college, or go on a trip or take on a home renovation project.
So, if you want to refinance your mortgage, do your homework and make the decision that suits your personal situation best. While the television, radio, and newspaper is screaming out that this is a great time to refinance, it might not be the case for you.