Mortgage Refinancing - 3 Rules

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Home Refinancing vs Home Equity Loan
Consolidating your debt can help you lower your monthly bills and interest rates. While refinancing and home equity loans can both help you pay off accounts, they have their own benefits. The best choice depends on your current mortgage terms and future financial goals.

The Goal Of Debt Consolidation

The goal of debt consolidation is to pay off your current debt with a new, l... Read refinance mortgage article



Poor Credit Mortgage Refinance - Get approved tips
Because of low interest rates, many homeowners are opting to refinance their homes and cash-out at closing. The refinance process is similar to the procedure of obtaining the original mortgage. Homeowners must be approved by a lender and pay fees associated with acquiring a new loan - closing cost, title search, settlement fee, etc. Yet, there are benefits to refinancing a home. Homeowners may o... Read refinance mortgage article



Mortgage Refinancing - 3 Rules
You might think that deciding to refinance a mortgage requires only a quick comparison of loan interest rates. Unfortunately, that's not really true. Refinancing is trickier than that! Fortunately, three useful rules of thumb can often help you make sense of refinancing opportunities.

Rule 1: Don't Ignore Total Interest Costs

You really want to use refinancing as a way to reduce the total interest cost you pay. While that sounds simple in principle, it is sometimes difficult to do. The interest costs you pay are a function of the interest rate, the loan balance, and the loan term period.

When people refinance, they tend to focus solely on the loan interest rate. But they often don't pay as much attention to the loan term or the loan balance.

When you use refinancing - even refinancing at a lower interest rate - to increase your borrowing or to extend the time over which you borrow, you often aren't saving money.

Rule 2: Trade Expensive Money for Cheap Money

For refinancing to make economic sense, however, you do need to swap higher interest rate debt for lower interest rate debt. This calculation, however, is tricky. To make an apples-to-apples comparison, you must look at the annual percentage rate that will be charged on your new loan - this is the best measure of the new loan's interest rate cost - and then compare this to the loan interest rate on your old loan.

You don't want to compare interest rates on the two loans nor do you want to compare annual percentage rates on the two loans. Again, just to make this perfectly clear: You want to compare the loan interest rate on the old loan to the annual percentage rate on the new loan.

When the annual percentage rate on the new loan is lower than the loan interest rate on the old loan, then you are truly paying a lower interest rate.

Comparing annual percentage rates with loan interest rates seems confusing at first. But note that you would pay only interest on your old or current loan, so that's all you need to look at in terms of its costs. With a new loan, however, you would pay both interest and any origination or closing cost fees. The annual percentage rate wraps the interest rate charges and setup charges, origination charges, and closing cost fees into one interest rate-like number.

Rule 3: Don't Lengthen the Repayment Period

Be careful that you don't extend the length of time you borrow by continually refinancing. For example, one common rule of thumb states that every time interest rates drop by two percentage points, you should refinance your mortgage. However, there have been times in recent history when following this rule would have had you refinancing your mortgage every few years. This could mean that you would never get your mortgage paid off. If you refinanced every few years, you would suddenly find yourself still 30 years away from having your mortgage paid.

Bellevue WA tax CPA Stephen L. Nelson is the author of both Quicken for Dummies and QuickBooks for Dummies and an adjunct tax professor for Golden Gate University's graduate tax school.

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Refinance Your Mortgage - Three Considerations

Joe and Helen's neighbors couldn't say enough good things about refinancing their mortgage. They mentioned how they had eliminated credit card bills, and lowered their overall interest rate. They had even been able to get some cash back to help with their daughter's college tuition. It sounded great, and Joe and Helen decided they should probably refinance too. But, is refinancing for everyone? Should you consider refinancing? Here are a few questions to ask to determine whether it might be a good idea for YOU to consider refinancing:

1. How high is my current interest rate? If the going interest rate is 6% and your loan is at 8.5%, you definitely should consider refinancing. In fact, the current "rule" is if your interest rate is 2 percentage points or more above the market rate, refinancing may be for you.

2. How long do you plan to stay in your current house? Are you planning to move this year or in the near future? Or are you in your house for the long haul? You need to be sure that the savings in interest money is enough to offset the costs of refinancing (closing costs, etc). However, even if you are planning to move within the next year or two, check with your current mortgage company. A little-known secret is that often they will refinance for you with no closing costs to keep your business.

3. Do you want to switch to a shorter term mortgage? Switching from a 30 year mortgage to a 15 year mortgage can significantly reduce your interest payments, and help you build equity much faster. There are a lot of calculators online to help you figure out the savings. Check out www.mortgage-refinancing-online-guide.com for useful articles, advice, and tools to help you in your decision.

These are only a few of the questions to consider when you think about refinancing your mortgage. Do a lot of reading, figure out your savings, and talk to a professional to find out if refinancing is right for you.

Casey Smith has worked for years in the mortgage industry, and often contributes articles to the popular website http://www.mortgage-refinancing-online-guide.com.


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