Should you Refinance your Mortgage

Many homeowners receive so many mortgage refinance offers in the mail that they can identify a refi offer in a stack of mail before even opening the envelope and even the best spam filters may let an advertisement slip through to the inbox once in a while. Although savvy homeowners toss the ones from fly-by-night companies in the real or virtual recycle bin, occasionally they will get one that looks promising from a reputable lender. For homeowners that are under the crushing weight of an adjustable-rate mortgage, the idea of locking in smaller payments at a lower rate is a dream come true. Or, is it? The truth is, mortgage refinancing is not right for everyone. The question is, is it right for you?

The answer, of course, depends upon many variables, and only you can decided whether a mortgage refinance is the best option for you and your situation. For example, if you were locked into a high-interest loan because you had bad credit, has your credit improved since you originally closed on your home? If yes, by how much? Also, will continuing to make payments on your high-interest loan cause you to go further into credit card debt or even lead to foreclosure? If the answer is yes, you may want to investigate your refinancing options.

Another point to consider is the current value of your home. If you bought your property during a real estate bubble, there is the possibility that your home may not have increased in value or, worse, may have actually dropped in value. If this is your situation, it will be very difficult to refinance because you will have little or no, or even negative equity in your home. This means you will have to fund the difference of what you still owe on your home versus what your home is now worth. Many people in the highest foreclosure areas are facing this type of dilemma. If, however, real estate prices in your area have climbed or remained steady and you have put some “sweat equity” into your home through improvements and upgrades, you may be a good candidate for refinancing.

You must also consider that there are costs involved with refinancing. There will be appraisal fees and closing costs and depending on your lender, you may have to pay some or all of these expenses upfront. Also, keep in mind that with a refinance, you are starting over. If you were able to bring some equity to the table, this may not be a major concern, but if not, you might want to consider other options including holding on to your current mortgage if possible.

Be realistic about what a mortgage refinance can offer you. The advertisements might say you can have a $700/month payment on a $200,000 loan, but once the mortgage company figures in your credit, what your home is worth, the money you can put down and all the fees and expenses that might be rolled in such as escrow, your payments may not be much lower than they are now.

If you think a mortgage refinance might help your situation, talk to a loan officer or apply for a loan online. If the terms of the loan are not appealing to you, you can walk away at any time before closing. The law is on your side, so you don’t have to worry about the mortgage company suing you for breach of contract or anything of that sort. In fact, even if you close on a new mortgage and then change your mind, you have a three-day “right of recision” to nullify the contract (some states allow even more time). While it is not recommended that you go this far in the process before bailing out, it is good to know the option is available.

Most importantly, if you choose to refinance your home mortgage, do your due diligence. Research the pros and cons of refinancing from a variety of sources, not just a mortgage lender’s website. Ask family, friends and coworkers who have refinanced recently what advice they can offer. Research home values in your neighborhood. Find out your credit score. The magic number for most lenders is 720, so if it is slightly below this, try to bring it up by paying down some other debts. If it is significantly below 720, a bad credit mortgage refinance may still be possible, but your refinance mortgage rate may not be significantly better than your current rate and the other costs of refinancing might undercut whatever monthly savings you would enjoy.

Before beginning the refinance process, first be sure to find out whether a loan modification is available through your current lender. Many mortgage lenders are losing their customers to other lending companies or through foreclosure and may be willing to negotiate with current customers to change their adjustable-rate-mortgage to a fixed-rate mortgage at a lower interest rate. If this option is available to you, it could save you thousands in refinance costs and will be a much simpler and less-stressful process than mortgage refinance.