Is Refinancing Your Home Right for You?

Refinancing your home can be difficult, but not if you consult with a professional lender who can streamline the process for you. The lender can help you figure out when, or if, you can refinance your mortgage.

Refinancing Your Home: Different Types Available

There are two major types of refinancing that are prevalent:

1. Rate-and-term refinancing is used when people want to save money. They refinance the remaining balance on their loans for a lower rate of interest and a specified number of years, or term. This brings the monthly payments down to payments they can more easily afford.
2. The second type of refinancing is called cash-out refinancing. In this type, people take out a mortgage for more than they owe on their current mortgage and use the extra cash to invest or to pay off existing debts.

Replacing an adjustable rate mortgage with a fixed rate mortgage, settling a divorce, or getting rid of FHA mortgage insurance are other reasons for refinancing a current mortgage.

Is Refinancing Right For You?

Mortgage closing costs can be steep, so they are important to factor into your decision on whether to refinance or not. For instance, if you have $3,000 in mortgage closing costs versus $100 per month of savings, your break-even point will be at 30 months, or almost 3 years. If you do not plan to keep your house for 3 more years, refinancing is not a wise move.

Refinancing can also cost more money if you start your refinance loan with a 30-year term rather than a shorter term mortgage. You can use Bankrate’s mortgage calculator to determine how you would fare with a refinance.

Cash-out refinancing is often used to pay down debt or to make repairs to the home. Cash-out refinances have advantages and disadvantages. They can be very helpful in clearing out interest rates on credit cards when they are used to pay them off, but refinancers can end up paying thousands more in interest from the debt that has been transferred from credit cards to a mortgage.

The other disadvantage of cash-out refinancing that is used to pay off credit card debt is in transferring an unsecured credit card debt to a secured debt in the mortgage. With an unsecured debt like a credit card, if a payment is missed, one may get nasty calls from the credit card company. With a secured debt like a mortgage, if payments are missed, the possibility of losing your house in a foreclosure is real.

Another thing to consider is that loans are front-loaded with major interest. The longer you have had your current mortgage, the more of each payment is going toward paying off your loan’s principal balance.

If You Do Decide to Refinance

It is wise to sit down with more than one lender so you can find your best mortgage finance rate. Each lender must issue you a loan estimate within three days of providing your basic information, such as salary and obligations. It is then up to you to compare those estimates and decide if refinancing is right for you.