09/29/2010 1. If you find yourself unable to afford your current monthly mortgage payment, it may be time to refinance. In a refinance, you take out a new loan under better rates and terms and use it to pay off your previous loan. Your home is still used as collateral. Nothing changes other than the loan terms. As a result, your monthly payment will be lower.
2. Refinancing your home is fairly simple. But you should ensure that your situation will actually improve with the new loan. You'll pay closing costs when you refinance. If you hope to recoup these costs in savings over time, you better make sure you'll actually be saving enough money to make it worth it. Some programs, such as the FHA mortgage and the VA home loan, can be refinanced cheaply and quickly. But depending on your current situation, a refinance may or may not be a step in the right direction for you.
3. If you have an adjustable rate mortgage, you should refinance immediately before the initial low fixed rate period has ended. But you may not need to refinance if interest rates as a whole are decreasing in the marketplace. This doesn't happen often, but it can happen, as we've seen over the past few years.
4. If you have a fixed rate mortgage, refinance only if interest rates decrease. Fixed rate mortgages generally come with slightly higher rates than adjustable rate mortgages, but over time, as market interest rates rise, your rate will become comparatively low. If you've been in a fixed rate for a while, you probably already have one of the lowest mortgage rates available, unless rates as a whole have dropped.
5. Determine your breakeven point. If you plan to sell your home soon, don't refinance. The closing costs will outweigh the minor savings you'll retain over the coming months. If, however, you plan to stay in your home for several more years, you may want to refinance. Your breakeven point is the point when you've paid off the closing costs of the new loan and you're simply saving money. If you plan to stay in the home past your breakeven point, a refinance is probably la wise idea.
