Why Refinance?

What if interest rates drop significantly after you obtain a mortgage? Many people refinance to take advantage of lower rates to reduce their payments or obtain a shorter term loan. Are you ready to refinance? The answer usually depends on your reasons for doing so. There are generally three main reasons why you would want to refinance:

Reduce your interest rate and lower your payments. This is why most people refinance. Lower interest rates mean lower payments. But you have to weigh the upfront costs of refinancing against the potential savings in your monthly payment. A common rule of thumb is to try to recover the cost of refinancing within two years. But, with no-cost refinance options now widely available you might want to consider the impact on your long-term costs.

For example, if you extend your loan beyond the number of payments you currently have remaining you could end up paying more interest over the life of the loan. This could offset the monthly payment savings. But again, the decision usually rests on how long you will keep the property.

Reduce your mortgage term to pay off your loan faster. When current market interest rates are lower than your existing mortgage rate, refinancing to a shorter term mortgage can save you thousands of dollars in interest charges over the life of the loan. This could be the case even though your monthly payment stays the same, or increases. Your equity will build up faster and your loan will pay off sooner.

Liquidate your equity to take "cash out" of the property. Borrowing against the equity in your home can be a low cost (and usually tax deductible) way to get needed cash. Mortgage interest rates are often less than other types of consumer loans, and the potential tax deductibility of the interest can reduce the "after tax" cost even further. However, although you might save on your payments each month you may incur more interest charges over the life of the loan due to the longer term. Be sure to compare the short-term advantages with the long-term costs. Consult your tax advisor for more information.