Home Mortgage Refinancing is taking out a mortgage loan to pay off the existing mortgage(s). Future payments are made to the bank providing the refinance loan. Typically, the choice to refinance is made when interest rates are lower than the original loan. Many people decide to refinance when interest rates have gone down, but it may or may not be a wise decision depending on your individual situation. It would be best to speak to a lender about the objective of the loan.

The lower the interest rate, less it cost you for the money that you borrowed. As a general rule, if the interest rate is 1 1/2 points lower than your current rate, it can be considered as a time to refinance. However, something to consider is the length of time that you plan to own your residence. You want to be certain that the cost to refinance will be recovered over the remaining term of the loan; that is, not the number of years left on your current mortgage loan, but the remaining number of years you intend to own the property.

Although your monthly savings may be substantial, you will incur some closing costs. Typically you can count on up to 1-2% of the new loan amount in closing fees in addition to title insurance. Your lender will estimate your closing costs for you. To justify refinancing, your closing costs must be recovered over the life of the new loan. By dividing the closing cost by the number of months you plan to own your home and add the result to the new monthly principal and interest payment you will determine if you "break even". If the resulting amount is less than your current mortgage payment, it is time to refinance.

You may also consider taking "cash-out" to payoff other debts or to invest. In this case you will need to determine that the cost to refinance is worthwhile in order to payoff those debts or invest in other markets. Consider not only the closing costs associated with refinancing, but the points you will pay for a lower rate and funds associated with paying off your existing loan.

Refinancing Tips

Whether your mortgage is up for renewal or you are considering mortgage refinancing in the middle of your term, we have some suggestions to save you money.

Almost all mortgages today are taken with a 15 or 30 year term, but are renewable or renegotiated after shorter terms of 6 months to as long as 10 years. When your mortgage comes up for renewal you are in a good position for mortgage refinancing without having to pay a penalty for doing so.

Sometimes the borrower can save some refinancing costs by using the lender who holds the current mortgage. This is generally true if that lender will waive particular costs, such as the survey because it is still current.

Even though your term is not up for renewal, you may think lower interest rates may make it worthwhile to look at mortgage refinancing. You will need to check if there will be a penalty for early renewal and compare the savings of the lower rate to the payout costs to determine if mortgage refinancing would be an advantage to you.

You may be looking at mortgage refinancing to finance renovations or a vehicle purchase or just so that you can lower your regular payments. These are all valid reasons for mortgage refinancing, but be careful not to extend your term or payments just to have a little extra money each month. The longer you take to pay your mortgage, the more money it costs you in the long term.