Why Do You Want to Refinance?

Posted by  on Apr 01, 2010

The U.S. has some of the best mortgage rates of all time right now. You can hardly read a newspaper, visit a personal finance Web site, or watch TV without seeing some kind of story or advertisement urging people to take advantage of current refinance rates. But before talking to mortgage brokers, think about why you think you need to refinance.

Your Home Is Not a Piggy Bank

Did you miss out on cashing out your home equity during the boom boom years leading up to the housing bubble? Remember all those people who gleefully cashed out their home equity to flip houses, take expensive vacations, and make upscale home improvements? If cashing out home equity is your goal, think again. Mortgage lenders have tightened the reins on extending credit to homeowners who want to use their homes as personal ATMs. In many cases, even people who have good credit are finding it tough to qualify for refinancing.

You Want Lower Mortgage Payments

Current mortgage rates could help lower your monthly payments. If refinancing can lower your interest by at least 1%, it may make sense to apply for a mortgage. Doing a mortgage refinance also could get you out of an adjustable-rate or interest-only mortgage into a fixed loan. That can help you avoid jumps in monthly mortgage payments when interest rates rise.

What About the Principal and Interest?

If you've been paying on your mortgage for years, refinancing could be a mistake. That's because when you refinance, most of the monthly payment gets applied to interest during the early years of amortization. Have mortgage brokers break down the numbers on any deals offered so you can understand how much of the payments go to interest and for how long. If you currently have a 30-year loan, think about refinancing to one with a 15-year term if you can afford the payments.


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