Home refinancing is inevitable for most homeowners

Common reasons include lowering payments and taking out home equity loans

In years past, people who bought houses took out a mortgage, kept it until it was paid off, and that was that. A generation ago, lending options were much more restrictive than they are today, and since most people took out 30 year, fixed-rate loans, the notion of refinancing didn’t even occur to most people. How times have changed.

Today, the average home loan has a life of about five years, maximum. We live in a more mobile society; people just don’t stay in their homes as long as they used to. We also live in a society where people want more out of their house and when the finances become available, owners will frequently sell to move up to a larger piece of property.

And some people refinance for other reasons, while never planning to leave their house. Some of these reasons include:

• Lower interest rate - When rates dipped to record lows in 2002-2003, millions of people flocked to their lenders to obtain loans at rates not seen since the early 1960’s. A drop of two percent in the interest rate can represent a significant drop in the amount of the house payment.
• Fixed interest rate - When rates were low, many homeowners took out adjustable rate mortgages, or ARM, loans in order to keep payments low while still being able to buy as much house as possible. Now that rates are increasing, many people with an ARM want to convert that loan to one with a fixed rate.

• Borrow against the equity in the house - With property prices rising substantially in the last ten years, many people have houses that are worth far more than the amount of their loans. They can take out home equity loans or refinance completely, taking cash out in the process to use for other things, such as home remodeling.
• Lowering payments by taking out a longer loan - The combination of a lower rate and a longer term can contribute tremendously towards a lower house payment. If you have already paid down a portion of your loan principal, refinancing in this way can have a huge impact on the size of the payment.

Before you refinance, you have to ask yourself how long you intend to remain in the house. Refinancing your loan costs money; usually several thousand dollars. It will take several years of lower payments to recoup the amount of money you spent taking out the new loan. Adding to these costs may be any prepayment penalties that you might have in association with your existing loan. Prepayment penalties used to be fairly rare, but with the recent refinancing boom, more and more lenders have been incorporating them into their mortgages, just to make a few extra dollars (or thousands, as it may be) should the borrower “jump ship” for another lender.

If the cost of taking out a new loan are such that you can eventually save money if you stay in the house long enough, refinancing makes sense. If you can stay in the same house and pay less for it, then why shouldn’t you?