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Lower your mortgage costs with a refinance
By Michael
D. Larson • Bankrate.com
 Always
check when rates are low
Whenever rates are low, many borrowers will find that refinancing
their first mortgages makes sense.
When you refinance, you are getting a new first mortgage that
pays off and replaces the old one. The move can lower your monthly payments
and/or your overall interest bill.
That's because you're replacing an older, higher-rate loan with
a new, lower-rate one. Someone who is a year into a 30-year fixed rate mortgage
for $150,000 at 8.5 percent can refinance into a new 30-year loan at 7 percent,
for example. Doing so cuts the monthly payment by $155 to $998 and the overall
interest bill by almost $42,200 to $223,000. (Search
for mortgage rates in your area)
More reasons for refinancing
Refinancing also makes sense for other reasons. You should consider refinancing
if:
1. You have high-rate second
mortgage debt. Some borrowers can refinance both first mortgages
and second mortgages into new, lower-rate first mortgages. They do this by going
through a cash-out
refinancing, or a refinancing in which the new first mortgage is larger
than the old one. Borrowers get the difference between the old loan balance
and the new one at closing to spend as they see fit.
2. You need to tap your equity for a big
expense. Rather than get a separate equity loan, some borrowers choose
to just refinance their first mortgages and take cash out at closing to pay
for home improvement projects or other things. The move can make sense for people
who need large sums of money and don't think they'll be able to pay their balances
off quickly. That's because first mortgages generally have lower interest rates
than second mortgage loans.
3. You
want to shorten your loan term and shave your interest costs. You may
not have been able to afford the payments on a 15-year loan when rates were
much higher, so you opted for a 30-year one. But now, rates have fallen enough
that the payments on a 15-year loan would be manageable. By refinancing your
current 30-year loan into a 15-year one, you can build equity more quickly and
slash your total interest bill.
It's not for everyone, though
Refinancing doesn't always make sense, though. You may not
want to refinance if the following apply:
1. You're a number of years into your
loan already. Someone who is 10 years into a 30-year mortgage may not
want to refinance into a new 30-year loan because that leaves them paying off
their homes for a whopping 40 years! Keeping a mortgage on the books for that
long boosts the overall interest bill for a home.
2. Your credit is worse now than when
you originally borrowed. If you've made late mortgage, credit card or
auto payments since you bought your home, your credit score will have fallen.
You may not qualify for the best rates anymore, so refinancing could actually
boost your payments and interest bill rather than lower them.
3. Equity loans and lines of credit cost
less. Depending on conditions in the interest rate market, equity loan
and line of credit rates can be lower than first mortgage rates. This can happen
when the prime rate is exceptionally low, as it is now. For borrowers who don't
need much money and don't plan to have their loans outstanding for long, the
no-closing-cost lure of a second mortgage can be a powerful one indeed.
-- Posted: March 16, 2003
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