What To Consider Before Refinancing Your Home Mortgage

September 19, 2009

Should You Refinance Your Home Mortgage?

Refinancing a home mortgage is only worth the effort if the resulting refinanced loan helps you avoid foreclosure, if it is sustainable AND if it reduces you total home loan costs.

During the market boom, the main reason people sought to refinance their loan was to take advantage of any home equity. Homeowners refinanced loans to get a higher principal and use the extra money for things like debt consolidation, buying a new car, paying their child’s tuition, or preparing for retirement.

Today, however, with the downturn of the economy and the bust of of the housing bubble, refinancing has now become a means to avoid foreclosure - ever since the Obama administration’s Making Home Affordable program for those whose mortgages are currently owned by Freddie Mac or Fannie Mae.

Under this program, your mortgage lender gives you a loan refinancing estimate. This shows your new monthly payment, new mortgage rate and the total amount you’re going to pay over the number of years specified in your contract.

Keep in mind that many people, after reviewing the payment and terms of the refinanced loan, find that it is NOT an improvement over the original. This is because you can’t simply compare monthly payments to monthly payments, especially if your original loan is an adjustable rate mortgage or ARM. In ARM refinancing, your monthly loan payment will always increase if you convert to a fixed higher rate. It may seem that the new rate is higher because you were given the option to only pay the interest of the loan, but ultimately the fixed higher rate would enable you to sustain the loan.

Therefore, refinancing for an ARM can be good if it’s expected to reset to a much higher rate in the next few years. It will help you sustain payments in the long run and will also help cut interests costs because of the record drop in rates right now.

So, if you’re currently at a fixed rate and you’ve been making payments for several years, look carefully at the full terms and conditions of any new loan. You just might be increasing your total loan cost, rather than lowering it.