REFINANCING

WHAT YOU SHOULD KNOW ABOUT REFINANCING

When mortgage interest rates fall, refinancing becomes an attractive option for many homeowners. By refinancing, you essentially take out a new mortgage to pay off your existing one. Lower interest rates on the new mortgage can allow you to:

Pay a lower premium every month — Because you’re paying less interest, your monthly payment could be significantly less after refinancing.

Get cash for the equity in your home – If you’ve had your home for more than three or four years, it has probably appreciated in value. Because your home is worth more, you can borrow more than you did with your original mortgage—and keep the excess. For example, suppose you borrowed $200,000 to buy a house now valued at $300,000. Banks will typically finance up to 75% of a home’s value—in this case, $225,000. With a cash-out refinancing, you could borrow $225,000, pay off the original mortgage of $200,000, and have $25,000 to put in your pocket. Most people use the cash for significant, major purchases, such as a remodeling project or college tuition.

Shorten the term of your loan — By refinancing with a lower interest rate, you may be able to reduce the term of your loan—from 30 years to 15 years, for example—without a significant increase in your monthly payment.

End your mortgage insurance payments — If you bought your house with no or little money down, you’re probably paying Private Mortgage Insurance, required by the lender to insure your loan. If you now own 20% or more of your home, you may be able to eliminate PMI when you refinance.

Refinancing can make sense even when interest rates are on the rise. If you financed your home with an Adjustable Rate Mortgage, for example, you may want to refinance with a fixed-rate mortgage, rather than risk staying in a mortgage that may soon become unaffordable.
Should you refinance? It depends. You want to be sure that the savings you realize from the lower interest rate are greater than the cost of the refinancing, which may include points and other closing costs. Before you refinance, check your current mortgage to see if you’re subject to a prepayment penalty, as you’ll need to factor this in along with other costs of refinancing.