Should you refinance your mortgage loan?
Julie Garton-Good, GRI, DREI

Are you considering refinancing your home to free up cash or maybe to get the monthly payment lower? It can make good financial sense if it's done for the RIGHT reasons.

First, determine what you want to accomplish by refinancing. It makes good sense to refinance if you'll lower the interest rate on the mortgage (from thirty to fifteen years), or move from an unpredictable adjustable rate into a fixed rate.

Before you make a decision, ask yourself these questions:

First, how long do you plan to keep the loan and the property? It makes little sense to spend money refinancing if you're not able to recover the costs of closing the new loan (ask your lender to figure out how long it will take to recover the cost of refinancing before you make application).

Second, if you're pulling cash out, will the money be used to good advantage? Since the equity in your home is like a savings account, using precious funds to purchase short-lived disposable goods may not be a good financial move. One good use for the cash might be to pay off non-deductible consumer interest or purchase other investments that can create a nest egg for you.

The lender may ask you if you want to pay additional discount points and fees to obtain a lower interest rate when refinancing ( a discount point is equal to one percent of the amount financed and is used to create a higher financial yield to the lender). To answer the lender's question, you'll need to know how long you plan to keep the loan.

Here's a general rule of thumb you can use:

It's best to keep closing costs low if you'll own the house only a short time--but it may be financially wise to pay more discount points to buy-down or lower the interest rate if you plan to keep the property for an extended period of time. This strategy can save you thousands of dollars in interest over the life of the loan.

Don't forget to shop first with the lender who holds the existing mortgage. It's good business for lenders to keep their existing customers happy instead of trying replace them. He or she may be eager to keep your business by offering reduced fees and competitive interest rates. Don't be afraid to ask what kinds of concessions the lender is willing to make to keep you from going elsewhere. Remember, home ownership can be fun and financially rewarding!