Should You Refinance?

Should You Refinance?

Housing is the single greatest expense for most families. With today’s rock-bottom interest rates, many are considering refinancing their mortgage to reduce monthly payments or to pay off their home more quickly. But this might not be a wise choice for everyone. These steps should help you figure whether refinancing is right for you.

$Determine if you’re a candidate for refinancing. How long do you plan to be in your house? What is your interest rate compared to today’s interest rates? Does your bank have a pre-payment penalty that might offset any refinancing savings? These questions (and more) will help determine if refinancing is appropriate for you. For a quick evaluation, get a quote for a “no-cost,” no-points mortgage. If the amount is lower than your current rate, it’s a good sign that refinancing would save you money because this rate includes closing costs.

$Shop around for the best rate. Look for the best deal. Visit www.bankrate.com to view a broad scope of loan information and rates. Look at rates at other websites and at local banks. Also, ask your current lender for a lower rate. Even if you’re charged a small fee, this option could save time and the expense of appraisals, credit reports, and other refinancing charges.

$Compare offers. At this point, you have to run the numbers. Take into account all the variables—interest rates, points (essentially upfront interest payments), closing costs, appraisal fees, your tax bracket, how long you plan to stay in your home, etc. Though this task may seem daunting, the web has several free calculators (check out www.kiplinger.com or www.fool.com) to help you compare one loan to another and your current loan to all the rest.

$Negotiate. Once you find a good loan at a competitive rate, see if you can do even better. Ask the lender to forego some of the costs associated with the loan, pay for your home’s appraisal, or give you a better interest rate. It’s a competitive environment, and some banks are willing to deal to get your business.

$Choose your loan and lock in your rate. You’ve done your research and found the best loan and lender. It’s time to lock in your rate. It usually takes about 30 to 60 days to wrap up a re-financing transaction. Most lenders will lock in your new rate during that period at no additional charge, but be sure to clarify this before you apply.

Everyone with a mortgage should consider going through these short steps. The payoff is too great not to. If you’re a candidate for refinancing, you can save thousands of dollars over the life of your loan. Or better yet, you can be on your way to owning your own home and becoming debt-free.

John Nardini is a Michigan-based financial counselor and a regular contributor to American Profile.

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