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The Mortgage Refinancing Decision: 12 Questions to Help You Decide

Is it time to refinance your mortgage, possibly for the second or third time in as many years? Yes, rates are still lingering at historic lows. Still, the strengthening economy may start pushing rates back up again. So, this may be your last chance for some time to consider the option of mortgage refinancing. What should you do?
("What was the Fed Thinking?" CNNMoney, January 29, 2004.)

First of all, keep in mind that the mortgage refinancing decision is about more than just rates. There are other factors to consider, such as time and paperwork. No matter what those consumer–friendly television commercials tell you, refinancing can be a pain in the neck and wallet. So, before you act, make sure the results are worth the investment in time and money.

Questions to Ask Before You Refinance

  1. Do you have a high–rate line of credit home equity loan already attached to your home? (Generally, HE loans run a percent or two above the standard rate.) If so, refinancing at a lower rate may be advisable. Think of refinancing as a consolidation loan on your house that can bring down both your interest rate and your monthly payments.
  2. Do you need cash out for other expenses, such as a new car or education loan for your children? Rather than borrow the cash elsewhere or take out a second mortgage, consider that first mortgages generally have the lowest rates ...and interest is tax deductible.
  3. Do you want to reduce interest costs and, perhaps, your monthly out–of–pocket mortgage payment? Going from 7% to 5.5% on a $250,000, 30–year mortgage will reduce payments from $1,663.26 a month to $1,419.47, a savings of $243.79 a month, or nearly $3,000 per year.
  4. Do you want to increase your monthly payments to shorten your loan period, lowering total interest paid over the life of the loan? The idea is to reduce your rate AND reduce the term of the loan, such as going from a 30–year mortgage to a 15–year one. As shown by the chart below, for example, you can save a total of nearly $160,000 by going from a 30–year to a 15–year mortgage at 6%. The question is whether you wish to take on the higher - nearly $600 - monthly payment.

    Monthly Payment And Total Repayment (Principal & Interest) On A $250,000 Mortgage
    Rate 15-Year Term
    (Total Repayment)
    30-Year Term
    (Total Repayment)
    5% $1,977
    ($355,750)
    $1,342
    ($483,250)
    6 % $2,110
    ($379,750)
    $1,499
    ($539,500)
    7% $2,247
    ($404,500)
    $1,663
    ($598,750)
    8% $2,389
    ($430,250)
    $1,834
    ($660,500)
    (This chart is for illustration purposes only.)

  5. If you have only a few years to go on your mortgage, are you aware of the consequences of extending the term of your mortgage dramatically? Lenders will often recommend increasing the length of the loan. If you have ten years left on a 30–year mortgage, you may want to avoid a refinance package that brings you back out to 20 or 30 years again. You'll pay a fortune in additional interest.
  6. Are there possible pre–payment penalties on your current mortgage? We see fewer and fewer of these today. However, they still exist. Before you refi, find out if there is a penalty for retiring the current mortgage early.
  7. Has your credit rating declined in recent years? Lenders advertise the best rate; however, your rate can shoot upward if the lender sees you as a credit risk.
  8. Will it take years to recoup your loan costs? If the lender saddles you with a ton of spurious fees and loan initiation charges, you may be better off sticking with your present arrangement. These costs can include points, fees, origination fees, appraisal, attorney fees, and more.

    Other factors to consider before making the refinancing decision:

  9. Have you calculated your total savings? This is the difference between what you are paying now and what you would pay after refinancing B but use this as a guide only if your primary goal is to trim your monthly expenses. Plus, there is the matter of total interest paid. This is where you need to be careful about extending the term of your mortgage. Ask the lender about total interest you will pay over the term of the loan.
  10. Should you go with an Adjustable Rate Mortgage (ARM) or a fixed–rate loan? ARM rates are cheap right now. Still, with an ARM, your rate and your payments will go up when rates go up overall. Many people believe the best deal is to lock in a low fixed rate right now and forget about it. Though you will pay a little higher rate today, it may prove downright cheap over time.
  11. Are you willing to shop around and negotiate? Money is a commodity. Some lenders are eager to get your business. Others may stand firm. The more you research and the more you negotiate, the better the deal you may get. Be willing to haggle over the rate, fees, points and the length of the loan. Even be willing to ask about 10–year and 20–year terms. Be creative and ask your lender to be, as well.
  12. Are you prepared to upgrade your insurance? In addition to protecting the value of your house and contents with your homeowners insurance, make sure you can handle your debt load. Generally, a term life insurance policy can be used to pay off your mortgage if you or your spouse dies prematurely. Just as important: Don't overlook the risk of losing your paycheck to a disabling accident or sickness. Disability insurance pays cash when you're not working. It could provide replacement income to keep you financially afloat while you are incapacitated.
    (Disability products available through one or more carriers not affiliated with New York Life; dependent on carrier authorization and product availability in your state or locality)

    (Sources: "Mortgage Checkup," Bankrate.com, March 11, 2003; "Should You Refinance?, http://www.homestore.com/homefinance/refinancing, undated)

Deciding whether or not to refinance your mortgage is not a no–brainer decision based solely on the prevailing interest rate. You will need to invest time researching whether going with a refi is right for you. Still, the work you put in can reap dividends.

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The Mortgage Refinancing Decision: 12 Questions to Help You Decide

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