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To Refinance or Not to Refinance, That Is the Question

by Kristi  Shibata
Mortgage Directory Columnist

Whenever interest rates drop, the immediate reaction of many is to refinance. Mortgage rates have seen all-time lows in 2008 and with help from the government more doors are opening for homeowners to get out of ARMs and fix their rates. Although a decrease in interest sounds like a good break, there are other factors in determining appropriate times to refinance.

It's Your Time to Refinance

There are many different reasons homeowners refinance their mortgage. Most want to reduce their monthly payments. Some want to build equity in their home; others want to change the terms of their mortgage. Homeowners who want to consolidate their debt also find that refinancing can help.
  • If your goal is to pay less interest, determine how long you will have to keep your loan for the savings to offset the costs of refinancing. Online mortgage calculators can help you do this easily and let you determine if a refinance makes sense.
  • If you find that you are able to contribute more to your monthly payment, perhaps due to an increase in income (new job!) or a decrease in expenses (kids graduate from college!), consider refinancing to a shorter term. Rates on 15 year fixed mortgages are lower than 30 year rates, you accrue equity faster, and pay much less interest over the life of the loan
  • If you have an adjustable rate mortgage and expect a rate increase, you might consider refinancing to a fixed mortgage plan. Again, the benefits need to offset the costs of refinancing, and your time frame is a key consideration.

Don't Close before Calculating Your Closing Costs

A major determinant of whether refinancing pays off is the amount of closing costs. Closing costs are expenses like lender charges, appraisal fees, and title insurance associated with getting your new mortgage. Make sure your lender discloses in writing up front the amount of closing costs and what they are for.

As with your first home mortgage, you should put as much research and time to search for the best refinance option that meets your needs. You will want to find the best lender that can offer you a mortgage rate and plan -- and that may not necessarily be the same lender you used the first time. Take your time, research carefully and calculate your best options.

HSH Associates

About the Author
Kristi Shibata is a public relations and communication specialist and regular Mortgage Directory columnist. She graduated from University of California, San Diego, with a BA in Communications.

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