Questions to Ask Yourself Before Refinancing Your Home

Does a refinance of your home loan sound like a good idea to you? If so, make sure you answer a few simple questions before you get the ball rolling. Since a refinance in many ways mimics the process you went through when applying for your initial mortgage – with the exception that now you are actually already living in the home – there should be no surprises to expect, and you most likely remember how to compile papers, fill out the loan application, and probably also have a good idea about which lender or broker you might want to work with for this loan.

There are a number of questions to ask before getting started, and perhaps the most crucial one is the question about interest rates. Are the rates sufficiently low to justify the expense of applying for a new loan? For example, if the interest rates are so much lower that you would save a monthly $100, it sounds like this might be a great deal. On the other hand, if the cost for this loan is $3,000 then it would take you about 30 months to break even. You can arrive at this result simply by dividing $3,000 by $100. If you think of moving in a couple of years, you would actually lose money in the deal. Thus, the savings are only truthfully realized if you stay in your home at least for another 30 months.

Another question to ask is whether or not any of the fees are negotiable. If you have a prepayment penalty tied to your original loan, you will not be able to negotiate it away. This fee is tied to the initial promissory note and you have already agreed to it. On the flipside, some lenders are willing to significantly cut their fees; all that is required is a consumer who asks for the discount. It pays to shop around for the lowest interest rates among the various financial institutions at your disposal and also the lenders’ willingness to negotiate on the costs of the loans. In some cases the lenders will run cash back offers that have you pay the fees, but then turn around and pay the cash back to the consumer. It is worthwhile to reinvest this kind of money into the mortgage loan – as an additional principle payment – rather than spending it on something else.

Last but not least, consider if you are happy with the loan product you have. If you currently have an adjustable rate mortgage, you might be better served with a fixed rate loan, especially if the cap on the rate adjustment is set fairly high. Considering that a good many adjustable rate mortgages have rates set as high as 11%, they might make a home unaffordable in just a few short years. Conversely, if you currently have a 30 year fixed rate mortgage but anticipate being able to pay off the loan a lot sooner, you may actually be better off with a 15 year mortgage and the subsequent long term savings you might be able to realize if paying off your home so much earlier.

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