Should you refinance your mortgage?

Have you refinanced your mortgage yet? Many home owners have recently taken advantage of some of the lowest mortgage interest rates we’ve seen in two generations. If you haven’t refinanced yet, it may not be too late. However before you run off to your local bank to sign mortgage documents, consider what you want to achieve and if it will benefit you.

Of course lowering your mortgage interest rate is a good thing, right? However you should also consider the mortgage terms and the cost of refinancing. Besides lowering the interest rate, you could refinance your mortgage to shorten the duration, change the mortgage type, cash-out on your home’s equity, or a combination of any of the above. These days, however, many homeowners are just hoping to capitalize on lower interest rates to reduce their monthly payments.

If you want to shorten the duration of your mortgage by refinancing your 30 year mortgage to 15 years, don’t expect to lower your monthly payment. Although mortgages with a shorter duration typically have lower interest rates, the monthly payment can be higher than a longer duration mortgage of the same type and amount because the amortization period is shortened.

If you want to change the type of mortgage you have, consider the advantages and drawbacks of various programs that may be available. There are many types of mortgages; some are considered to be risky or advantageous depending on prevailing markets and your personal financial situation. Not for every home owner, mortgage types such as the balloon mortgage, reverse mortgage, or the many configurations of hybrid mortgages offer the mortgage holder specific benefits and risks. Home owners with these types of mortgages may refinance more often because of changing markets and financial conditions.

Although it’s not in vogue these days, cash-out refinances are still offered by some lenders to pay down debt, home renovations, or any other sensible reason you could use cash. If you are seeking to cash-out equity in your home, be prepared for stricter underwriting to make for a rigorous mortgage process. Depending on the lender and program underwriting requirements, you may also be required to document the purpose for the cash.

Although mortgage refinancing has recently been appealing due to very low interest rates, many home owners are having trouble qualifying. Remember that just because you may have qualified for a mortgage in the past, changes to your finances and credit history as well as changes in the mortgage industry could affect your ability to refinance. Another qualifying issue to consider is the loan-to value of the refinance, since many homes across the country have recently depreciated in value.

Even obtaining a FHA or VA streamline refinance has become increasingly difficult for some home owners. Once considered a “fast-track” refinance option, obtaining these streamline refinances have become more difficult in the last year because of changes to lender underwriting requirements.

If you’re still thinking about refinancing, compare rates as well as lender fees and mortgage terms. Determine if the cost of the refinance merits the advantages, as well as if there are alternatives. The Federal Reserve Board (federalreserve.gov/pubs/refinancings), the Federal Trade Commission (ftc.gov), Fannie Mae (fanniemae.com) and Freddie Mac (freddiemac.com) offer consumer resources to help you understand the benefits, drawbacks, and considerations of mortgage refinancing.

By Dan Krell
Copyright © 2010

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.