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By Doreen Martel

When to consider refinancing a mortgage

Mortgage interest rates across the country are still low, and this means homeowners are still considering refinancing. Before considering refinancing a home mortgage a homeowner should weigh various factors and determine if it is a good idea.

Understanding refinancing options

There are two specific types of refinancing options that are available to most homeowners. Here's how each of them works:

  • Rate and term refinance – When a borrower decides they would prefer a lower interest rate, they will apply for a rate and term refinance. In this case, the length of time needed to pay off their loan could change. For example, if the borrower has had the home for 10 years, they have paid down 10 years' worth of their current mortgage which may have been a 30-year fixed. Refinancing into a new 30-year fixed loan may not be their best option. However, refinancing to a lower-rate, 15-year mortgage may be beneficial as this will reduce the time they are paying on their home as well as save them money.

  • Cash out refinance – In this instance, a borrower will use the equity in their home to take cash out of their home. This can be helpful for those borrowers who may be paying student loans or credit card debt or those wishing to purchase a new vehicle. In these cases, the borrower may wind up paying a lower interest rate but they may also be taking a mortgage for a longer period of time than it would take to pay off their existing loan.

Weighing the pros and cons

Before making a final decision to take a new mortgage, a homeowner must carefully weigh the upsides and downsides of a new home loan. Someone who has an adjustable rate mortgage who is concerned about increasing costs over the life of the loan is an ideal candidate for refinancing. However, someone who has been in their home for 10 or more years may find refinancing means they will pay more over the long term than they need to.

Finding the break-even point

To determine if refinancing a home mortgage is the best option, it is important to look at the total costs of a new loan. Application fees and closing costs are often higher than many borrowers expect them to be and this can make a new loan unattractive. Borrowers who are moving from a mortgage where they are paying six percent in interest on a 30-year note may think a five percent note for 30 years is a better loan but the fact is this often means they are going to be paying for 30 years. If their existing note has only 20 years remaining, then a new 30-year note, even with the lower interest rate, may cost them more money over the life of their loan.

Before deciding if refinancing a home is the right move, a homeowner should carefully weigh the costs involved including paying on a new mortgage for a longer term. In addition, the borrower's current financial picture, the length of time they wish to remain in the home and what they hope to accomplish by refinancing should all be factors which are considered before determining if refinancing is the right decision.

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