To Refinance or Not to Refinance?

That has certainly been the question for many homeowners for the past several years, and it continues to be a hot topic. With interest rates being at their lowest point in decades, many Americans opted to answer that question with a resounding yes! And their decision certainly seemed to make sense. But as rates have begun to creep back upward, many fence-sitters still face the same quandary…should I refinance now, or should I wait and run the risk of interest rates being even higher later on?

First, let’s spend a few moments discussing the general types of refinancing that are available. If you already have a mortgage in place, you can choose to replace it completely with a brand new first mortgage. (We’ll discuss why you might want to do this a bit later.) If you’re happy with your current mortgage and have enough available equity in your home, you can obtain addition financing by adding a fixed- or adjustable-rate second mortgage. If you’d like a bit more flexibility, you can opt for a Home Equity Line of Credit (HELOC). Which loan you choose, of course, should depend upon you own specific financial situation and needs.

There are numerous very good reasons why you might consider refinancing. If your existing mortgage has a high interest rate, and current market rates are at least two (2) percentage points lower than what you are paying, then it’s probably a good idea to look into refinancing that mortgage. That percentage point difference is needed in order to insure a reasonable likelihood that your savings will offset the costs of obtaining the new financing. Of course, you must keep in mind the reasons why the original loan interest rate may be high. Were rates simply higher when you got the loan, or were your credit files a little spotty at that time? If they were, but you’ve been making your mortgage payments very solidly for at least a few years, then you could still possibly qualify for a lower interest rate.

Also, many people choose to refinance in order to consolidate high-interest debt (such as credit cards, vehicle loans, department store accounts, etc.). This has the added benefit of making that debt tax-deductible by bringing it into a mortgage. (Be sure to consult your lawyer or tax accountant for specific details.) You may need to pull money out of your equity in order to pay college or medical expenses. You may want to take that long-awaited vacation around the world, or just install a pool in the back yard. All of these are valid reasons to look closely at refinancing.

You must be careful, however, when searching for the best deal. Competition among banks and mortgage lenders is fierce, and many of them are not above using tactics which are in their best interests, but certainly not yours. One of these tactics might be teaser rates. You’ve seen them before. These are rates which are several percentage points lower than the lowest standard market rates. Credit card companies use them frequently. Be sure to read the fine print on these offers. Once the teaser rate period ends, you could find yourself locked into a higher-than-market-rate loan, along with a penalty for prepayment if you try to get out of it early.

The decision to refinance your mortgage depends not only upon current interest rates, but on your own personal circumstances and needs. As always, do your homework. Talk to lending professionals about what’s available. Shop around. Compare numbers with our Should I Refinance? Calculator. Gather more information on refinancing and other mortgage topics. With the right counsel, you’ll be well-equipped to make the decision that’s best for you.