Mortgage refinancing requires some forethought

Home loan refinancing may or may not make sense, depending on factors

Buying a house is an expensive proposition, and obtaining a loan to buy one is also a daunting task. It requires a lot of time, effort, paperwork and patience, all put forth in hopes of obtaining an obligation that will last for 30 years or more. Fortunately, you only have to do it once. Or do you? Sometimes circumstances will present themselves that may make it worthwhile to refinance your mortgage.

What sort of circumstances would make refinancing worthwhile? The most common would be a dramatic drop in market interest rates. Since most of the payment during the early years of the mortgage repayment schedule is interest, it only stands to reason that lowering the rate would lower the payment. Another common reason for refinancing is a “cash out refinancing”, where the house is refinanced with the borrower being permitted to take a cash sum out of the home’s equity to use for remodeling or debt consolidation purposes.

Those who consider refinancing should be aware that there are a few rules regarding whether or not doing so is a good idea. 

Here are a few things to consider if you are thinking about refinancing your home.

Closing costs. As with any loan, there will be closing costs, and they can easily run as high as five percent of the loan amount. Take this into consideration when deciding whether to refinance. These costs include loan fees, paperwork fees, property taxes and more.

The interest rate. A rule of thumb in the industry is that it is probably not worthwhile to refinance if the interest rate on the new loan is not at least 2% lower than the existing loan. Be aware that this is only a rule of thumb. The real factor is how long you will remain in the house. There are closing costs associated with any loan and if these costs are divided by the monthly savings from the new rate, the resulting figure is the number of months you will need to remain in the house to break even on the closing costs. Will you stay that long? If not, then keep your existing mortgage.

Cash out? Simple refinance? What sort of loan do you need? The amount of money you may borrow against your house is determined by what type of refinancing you have in mind. If you are taking out some cash, the amount will probably be lower.

Reasons for doing this. Debt consolidation? Home equity loans are good for that, as is a cash out deal. There are benefits, such as the fact that the interest on these mortgages is tax deductible. Be aware that if you are consolidating credit card debt, you are putting your property on the line as collateral. There is some risk involved, especially if you are not financially responsible. You must not max out your credit cards again.

These are just a few things to consider if you are thinking about cashing in your existing mortgage for a new one. Millions of Americans have done so in the last five years as interest rates have fallen. But be aware that there are reasons not to do it, as well.