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The Pros and Cons of Refinancing your Home

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RISMEDIA, Oct. 1, 2007-Consumers with adjustable rate mortgages scheduled to reset in the coming months might be researching their refinancing options-especially considering the recent drop in 30-year fixed mortgage rates. According to the Mortgage Bankers Association, 30-year fixed-rate mortgage rates dropped to 6.25% last week in anticipation of the Federal Reserve’s rate cut.

The most obvious benefit of refinancing your home is a lower monthly payment. For example, the principal and interest on a 30-year $150,000 mortgage at 7.25% equates to $1,023. In contrast, your monthly payment for same loan at 6.25% is only $924. While the thought of a lower payment is enticing, there are a few things to consider before signing on the dotted line.
Refinancing costs money. The phrase “no- cost loan” is used a lot in commercials, but may not be totally accurate. “No cost loans” will usually carry a slightly higher rate than a loan that does not pay your costs. In addition, you may still have to come out-of-pocket for incidentals such as credit reports and an appraisal.

Not everyone gets the best rates. To get today’s best rates, you have to qualify. Therefore, if you have less-then-perfect credit, you may want to improve your credit standing before you try to refinance. In addition, to get the best rates, you’ll need to keep your borrowing to less than 80% of the value of your home.

Use your monthly savings wisely. Since you are already used to a higher payment, it is smart to use the difference to your best advantage. Some ideas might be to pay down debt or establish a retirement fund.

Refinancing is not right for everyone. If you have a prepayment penalty on your existing loan or will not be in your home long enough for the savings to outweigh the costs, refinancing may not be in your best interest. In addition, if you are taking equity out of your home to pay down credit cards, but are concerned that you may charge again, this financial move could actually exacerbate your debt problems.

Don’t get caught at tax time. Most people’s largest deduction is their home mortgage interest and lower interest equals a smaller deduction.

“Finally, you might consider refinancing a 30-year mortgage to a 15-year note,” said Cate Williams, vice president of financial literacy for Money Management International. “While you may not save as much on a monthly basis, interest rates are even more attractive for shorter loans and the amount you save in overall interest payments can be substantial.”

For more information, visit www.moneymanagement.org.

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