Should I Refinance My House?

By Ned D'Agostino
The question 'Should I refinance my house?' is a classic one asked by many homeowners over the years. It is not always an easy question to answer and should be looked at with careful consideration. Here are some things to think about, and some reasons that people usually decide to refinance a mortgage.

Think about your current mortgage situation. If your loan is an adjustable rate mortgage, you may be wiser choosing a low fixed rate loan. An ARM is usually only advantageous in a higher rate environment because it offers a low rate at the time. In a favorable rate environment, locking in a low rate will be better for you over the life of the loan, since you will still have a great rate when rates go up. If you have a balloon payment coming due, refinancing may be the best choice.

If you have an interest rate that is significantly higher than the current market rates, refinancing may also be a good option for you. Keep in mind that most loans will require you to pay closing costs similar to the ones you paid when you took out your current mortgage. It is important to calculate how long it would take you to recoup those fees with the amount of money you would be saving each month on your new loan.

If you are planning on moving in the next couple of years, refinancing may not be the best choice for you. In addition to not being able to get back what you paid in closing costs on a refinance, you should also consider whether your new loan would have a pre-payment penalty. Most mortgage loans have a pre-payment penalty of some sort. They average around two to five years. These penalties can be significant and you may end up losing money in the end if the savings is not more than the money you would be shelling out.

If you are not planning on moving in the near future, there are a couple other things to think about when answering the question 'should I refinance my house?'. Find out whether you can get a lower rate than you are currently paying. Even a quarter of a percent on a large amount over thirty years can be a significant savings.

It is important to think about what your new payment would be. If you are taking advantage of a cash out option, your new loan will be a larger amount than your old mortgage loan. As a result, your payment may be higher. If your new rate is much lower than your old rate, your payment may go down. Overall, you should make sure that your loan payment will fit comfortably into your budget.

Refinancing your home can have distinct advantages, but if you refinance at the wrong time it can be very detrimental to your financial health. Make sure you use a good mortgage calculator to see if refinancing will better your situation. If the numbers all make sense, make sure you choose a reputable lender who offers a great rate.