Understanding Your Refinancing Options | Mortgage

by JohnDashwood

The decision to refinance is based on a number of factors. The terms of your current loan, the amount of your current loan and the remaining balance. It also is dependent on the amount you intend to refinance. Refinancing is a way to get your equity out of your home without selling it. If the new loan offers better interest rates and terms, you may be able to save money.

The reasons most people chose to refinance are to obtain more favorable interest rates, to use the equity they have in their home, to consolidate high interest loans like credit cards, or to simply to lower the amount of their monthly mortgage payments. If your reason for seeking refinancing is lower interest rates, you may not save money with your new loan. This is especially true if you intend to remain in your house over the long term.

If you currently are 15 years into a 30 year mortgage, you will probably not realize much in savings on a refinance, in fact you may actually lose money. If you are only 8 to 10 years into your 30 year mortgage, and your new interest rate is 1% to 2% lower than your current mortgage, you could in fact see some significant savings.

Don't just sign on the dotted line and trust your lender's integrity. Review every aspect of the terms of the loan including origination fees and closing costs. How much of your monthly payment will go to equity and how much to interest? At what point will you actually break even on the loan? Compare all the terms to the terms of your current mortgage and see if, over the life of the loan, you will actually realize any savings. You may want to seek advice from a real estate attorney or account if you don't understand the terms and costs of your current loan or the cost of refinancing.

Before you do the math, check out your FICO score, the prevailing equity of your home, and your current debt to-income ration. These are the three considerations that will impact on your refinance. A low FICO score earns you higher interest rates and the problems worsen if the equity of your home is low and your current debt-to-income ration is high. If this is the case, a refinance is not for you.

A point that many people fail to consider when refinancing is that the fees and closing costs are part of the cost of the loan. The origination fee for the lender and the closing costs for the new loan can add thousands of dollars in costs to the new loan. This may offset any savings you realize with a lower interest rate.

Thankfully, under the Obama administration, this has been scrapped BUT only for those who qualify e.g. Losing their jobs because rescission, hospitalization, or other problems that warrants the scrapping of the fee. If you can prove this, you can get government assistance to get a refinance. If you qualify, you can enjoy an affordable refinance but not until then.

Until you have reviewed your financial situation and the requirements for a refinance, you can assess your chances for paying off a refinance successfully. But if you are dealing with an Adjustable Rate Mortgage and want to switch to a lower Fixed Rate Mortgage, lock into the lowest rate now after considering everything that goes into a refinance. If you'll break even soon enough and pay lower rates which you can comfortably afford, then by all means, check this option.

DISCLAIMER: This article is provided as information only and is not to be taken as financial advice.

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