Should You Ever Refinance Your Home Mortgage?

If you have a fixed rate mortgage loan and interest rates are falling, it makes sense to consider refinancing. However, as is the case with most finance matters, there are no easy answers. Refinancing can be a smart move, but it also costs money. When considering whether you should ever refinance your mortgage, you should consider that the refinance may end up costing you instead of saving you.

If your ARM has reset to a higher rate, refinancing is a good option. Adjustable rate refinance mortgage rates change over the loan term, and when rates are on the decline, that can be a good thing. However, you can end up paying more than you would with a fixed mortgage. Fixed rate mortgages are the gold standard where home loans are concerned, and one of these can be the best way to finance a home purchase, because the home payment remains constant.

A stable payment isn't always an asset, however. If mortgage interest rates decline in the future, you will find yourself paying more in interest than you would if you'd just gotten your loan. The reverse is true as well- if you lock in a low fixed rate, and rates rise later on, you'll be saving a lot over those who've just obtained loans. When you're contemplating refinancing your mortgage, you should think about how long you plan to stay in the home. The closing costs alone will be in the thousands, so think about how long you would have to stay there in order to break even.

Another important consideration is how much equity you have. Most lenders and banks require at least 20% equity for refinancing, but it might still be possible to get a refinance without that equity level. However, these loans typically come with higher interest rates. If you've been in the home for a while and you've built up sufficient equity, you will save even more because you may be able to finance for less than the original loan, reducing your monthly payments.

Many people forget that refinancing a mortgage also extends the loan's terms. If you've been paying on a 30-year note for the last ten years, you have two more decades to go. If you refinance and choose another thirty year note, you start all over, but some actually choose to refinance to a 10- or 15-year note.

When asking "Should I ever refinance my mortgage", there are many things to consider. True, lower interest is good, and can save you money, but it's not that easy. You need to stay in the house long enough to reap the benefits, and figure out if it's worth it to change the loan's terms. Also, your credit history is very important. If your record has some blemishes, you probably won't be able to refinance at the best rates. If rates are tempting you to think about a refinance, it's worth considering. Just be sure that the rate isn't the only reason you're refinancing.