Mortgage Rates Are Dropping; Should I Refinance?

Q:Should I take advantage of the dropping interest rates by refinancing my mortgage?

A: Refinancing a mortgage is essentially paying off the remaining balance on an existing home loan and then taking out a new mortgage on the same home, often at a lower interest rate. It may sound like a no-brainer, but there are many factors to consider.

Is it a good time to refinance?

Mortgage rates have been falling steadily over the last few months. If you’re thinking of refinancing, it might be time to make a decision in order to lock in the lowest possible rate.

Three reasons a refinance might be right for you:

1. You’re looking to consolidate debt

If you currently have some high interest loans, refinancing is a good way to consolidate your debt to a low fixed rate with a more affordable payment.

2. You’d like to shorten the life of your loan

If you have a mortgage with a high interest rate, but you can easily meet these payments, consider refinancing to a shorter-term loan. You may be able to pay off your loan in half the time without changing your monthly payment much.

3. Your credit is strong and you’d like to lower your monthly payments

Current mortgage rates make this an excellent time to refinance with a lower interest rate. If your credit is strong, a refinance can save you hundreds of dollars on your monthly payments.

When refinancing your mortgage is a bad idea

1. If you’re in debt.

Most people who refinance to have extra cash for pulling themselves out of debt end up spending all the money they save, and then some. Without a change in spending habits, there will be little change in debt.

2. If a refinance will greatly lengthen the loan’s terms.

If you’ve only got 10 years left on your mortgage and you want to refinance to stretch out those payments over 30 years, you won’t come out ahead. Any money you save will be lost in the cost of the refinance and the extra years of interest on your loan.

3. You don’t plan on living in your home much longer.

If you plan on moving within the next few years, the money you save might not come close to the cost of a refinance.

How much will it cost?

Remember those fees and closing costs you paid when you first bought your house? Prepare to pay most of them again. Broker fees will vary, but a typical refinance will cost anywhere between 3-6% of the loan’s principal. Before proceeding with your refinance, make sure you’ll actually be saving money