Feb 16 2009

Thinking About Refinancing?

Are you thinking about refinancing?

Is it even possible in the current economic climate?

The answer is, maybe, and timing can be everything.

If you have an excellent credit history and feel secure enough to be able to make the monthly payments, but want to free up equity for better liquidity, this might be the time to do it.

Generally speaking, it may be a good time to consider refinancing your home when you can obtain an interest rate that is at least 2% lower than your current mortgage interest rate.

However, there are other considerations that come into play.  With the current economic recession brought about by the sub-prime mortgage crisis, home values have declined.

If you decide to refinance based upon the immediate need to pay off high interest rate loans or credit cards, or if you plan on making improvements to your home to increase its value, it may be necessary to wait until the home values increase before taking this step.

You may be better off bootstraping now, in order to avoid a whole lot of pain later on.  Better to pay down those credit cards in a disciplined way, than tap into the equity in your home which you’ve worked so hard to build.

You will also have to take into consideration the cost of refinancing a mortgage.  Several questions need to be answered, such as:

How much will I save if I refinance now?

Can I afford to pay the fees associated with refinancing such as PMI (prepaid mortgage insurance), inspections, title search, and points, without having to add these to the initial refinance cost?

Research will be required to determine if it is feasible to refinance your home.  This may include visiting your lender and discussing the pros and cons of refinancing at this time.

You may also wish to compare the difference between refinancing and the cost of your current mortgage to determine if refinancing will yield a significant saving.

There are many online mortgage calculators that can help you in this endeavor, so make sure you do your research in order to look before you leap.

Another consideration is the length of time you will remain in your home.  Re-fi for the whole of the house’s equity pretty much wipes you all you’ve put into it. If you are not careful, you could end up in worse shape than before, and without a safety net any longer.

Therefore, whether you revisit your current lender or research other mortgage lenders, having accurate accounting of your monthly mortgage versus how much it would cost to refinance (including the aforementioned fees) and whether or not there is an actual savings will be the deciding factor.

Most experts advise that if, within seven years, the cost of refinancing does not yield a substantial savings to the homeowner specifically as relates to paying off all the fees incurred during the process, it is not worth the time or the money to refinance.

Make sure you look at your financial situation realistically. Have a budget, and stick to it. If you are just trying to re-fi in order to pay off credit card debt, don’t.  The sacrifices you will make now will be worth it in the long run, without adding all sorts of fees and paperwork into the mix.