Mortgage refinancing: Know when or if it's time

Shopping for a refinance mortgage can start at home by requesting lowest mortgage rates online. Before doing so, it's important to understand how you want refinancing to improve your finances and how or if it can do so.

Refinancing: The good, the bad, and the…

Not so long ago, many homeowners were drawing against rapidly increasing home equity and buying everything from exotic travel to new vehicles. Sadly, difficult economic conditions have stripped many homeowners of the ability to refinance their mortgage loans for additional cash out. In some cases, homeowners may not qualify for refinancing at all. Here's what you'll need to know to determine if refinancing is feasible in your circumstances.

Your home equity: Is there enough for refinancing?

Conventional mortgage lenders typically do not refinance more than 80 percent of a home's current appraised value. The refinance mortgage must be enough to pay off your current mortgage. You would also need to have cash on hand for paying closing costs and lender fees. If you have enough home equity, it may be possible to wrap some closing costs into the loan amount.

Estimating home equity is easy. Simply divide your home's value by the amount you owe. If your LTV doesn't exceed 80 percent, you may qualify for refinancing. If it's higher, you may refinance under FHA guidelines, but extra costs can diminish potential savings realized with a lower mortgage rate.

Understanding the break-even period

Sometimes you refinance to save on interest paid, sometime to lower your payment, and sometime you can do both. If paying less while you own your home is the goal, your break-even period becomes part of the equation. Refinancing costs must be calculated against potential mortgage interest savings Before refinancing, you'll want to determine how long it will take for your monthly savings to recoup refinancing costs. Shoprate.com's refinance calculator tells you how long it will take to break even and how much you can save (or not!) by refinancing.

Refinancing for debt consolidation

Wrapping high-interest consumer debt into a new mortgage can lower your interest expense and your payments. Understand though that it puts your home at increased risk of foreclosure. If your debts are caused by impulsive spending, you could end up owing more on your home and incurring more debt. Credit counseling and debt help services provide help for those struggling with debt.