Deciding To Refinance

Traditionally, the decision on whether or not to refinance has meant balancing the savings of a lower monthly payment against the costs of refinancing. But in recent years, companies have introduced "no cost" and low-cost refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. (These refinancing packages compensate with a higher interest rate or by including some of the costs in the amount that is financed.)

With traditional refinancing, the most often cited rule-of-thumb is that the interest rate for your new mortgage must be at least 1 percentage point below the rate of your current mortgage for refinancing to make sense. However, with the newer low- and no-cost refinancing programs, it can be worth your while to refinance to obtain a smaller reduction in interest rates.

How long you expect to stay in your home is also a factor to consider. If you'll be moving in a few years, the month-to-month savings may never add up to the costs that are involved in a refinancing.

The two primary types of Refinance programs are “Rate & Term” and “Home Equity”.

Rate & Term

This has been a very popular choice for all homeowners the past few years as mortgage rates have declined steadily from about the year 2000 thru 2005. All mortgage programs are available to existing homeowners who want to lower their monthly payments. To determine whether the timing is right for you to refinance, you need to review your existing home loan, determine how much longer you plan on living in your house and analyze your financial goals.

Home Equity

This is a specific type of refinance that allows one to receive cash from the equity built up in their home. For a primary residence one can take cash out for up to 80% of the appraised value of the home – for non-primary, up to 95%. This is a very popular alternative way to pay off high interest credit card debt, finance a major home improvement project and pay for schooling or just to consolidate debt. The main advantage to this type of loan is that mortgage rates tend to be the lowest interest rates of any type of loan available and the interest is tax deductible.
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Refinance Considerations

When you're making your decision, there are several things to keep in mind.

If your current interest rate is significantly higher than today's lowest rates, you may be able to roll your loan costs into the loan and still get a lower rate than you have today, thereby reducing your interest payments and saving money immediately.

Second, if you are planning to stay in your home for at least three to five years, it may make sense to pay "points" (a point equals 1% of the loan amount) and closing costs to get the lowest available rate.

And third, you can avoid laying out cash and still get a low rate by adding the points and closing costs to your new mortgage. Does that mean shouldering a lot of extra debt? Not necessarily. If you've had your current mortgage for at least three years, you've probably reduced your balance by several thousand dollars. So you may be able to tack your closing costs onto your new loan and still end up with a mortgage that's smaller than your original one — plus, of course, a lower rate and lower monthly payment.
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Mortgage Refinance Costs

When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With a new loan, you again pay most of the same costs you paid to get your original mortgage. These can include settlement costs, discount points and other fees. You also may be charged a penalty for paying off your original loan early, although some states prohibit this. The total expense for refinancing a mortgage depends on the interest rate, number of points and other costs required to obtain a loan. To obtain the lowest rate offered, most mortgage companies will charge several points and the total cost can run between three and six percent of the total amount you borrow. So, for example, on a $100,000 mortgage, the company might charge you between $3,000 and $6,000. However, some companies may offer zero points at a higher interest rate, which may significantly reduce your initial costs, although your payments may be somewhat higher.
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