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8 refinance questions to ask if you're savvy

Posted by  on Sep 21, 2012
 

Today's low mortgage rates provide powerful incentive to proceed with refinancing your home, but undertaking the expense without a clear understanding of your goals and circumstances may negatively impact your finances instead of improving them. A better approach to refinancing than simply finding the best rate and jumping in is to tailor your refinance to your circumstances first and then time the market.

8 threshold questions that clarify when to refinance

Lower interest rates and monthly payments are not the only rewards to be gained by a refinance. But the benefits differ depending on your goals, so asking yourself these questions can help you make your best decision:

1. How long do you intend to stay in your home? If you expect to move before you would recoup the cost of your refinance, you may be better off to stick with your current mortgage loan. However, if you'd like to reap substantial savings and know for certain that you'll sell your property within the initial fixed-rate period, a 3/1 or 5/1 adjustable rate mortgage could be a good deal for you if the numbers work. Just make sure you know you can handle the maximum possible payment if your plans change.

2. Do you want to pay off your mortgage before retirement? If so, refinancing into a shorter term loan is a great option. But if you can't qualify or the payments seem too high, make extra payments on your principal to pay it off faster.

3. Are you experiencing cash-flow problems? Refinancing into a new 30-year fixed-rate loan might be best for you, as long as you recognize that you would be extending your mortgage for a longer period of time. So while you may be paying less interest per month, you could end up paying more interest in total over the life of the loan.

4. Are you saving enough for other needs? While paying off your mortgage can be a great relief, borrowers who are not paying off their credit card debt, building an emergency fund, or saving for college and retirement should avoid bumping up their mortgage payment with a shorter-term loan.

5. Can you lower the interest rate on your mortgage? The larger your mortgage, the bigger the impact of a rate decrease on your monthly payments. Using a refinance calculator can help you make sure the savings are worth the cost of the refinance.

6. Can you lower your monthly payments? While lower payments are helpful, be sure to look at the overall cost of your mortgage. You don't want to save each month but pay too much in the long run.

7. Can you shorten the loan term? A shorter term loan can be a powerful financial tool as long as you can manage the potentially higher payments.

8. Can you pay off the costs of the refinance in one year or less with the monthly savings on your loan payment? Even if you wrap your refinance costs into your mortgage balance, you need to weigh those costs against your savings.

If your answer to these questions points toward refinancing, tracking current mortgage rates helps to time your refinance to just the right moment. In addition, consulting with a lender to review your mortgage refinance options can put you on the road to substantial savings, early retirement, or better cash flow.

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