Should I Refinance My Mortgage?
Deciding whether to refinance a mortgage can be a difficult and confusing process. In addition to the many mortgage options that exist, there are costs associated with refinancing that can make it hard to know whether the financial benefits are worth it.
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Function
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Mortgages are refinanced for a number of reasons. These include lowering the mortgage payment, shortening the length of the mortgage, and paying off other debts by including those amounts in the mortgage.
Types
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Mortgages are available in two basic types: fixed rate and adjustable rate. Fixed rate mortgages are most commonly offered in 15- and 30-year terms. Adjustable rate mortgages recalculate monthly payments based on an interest rate adjustment after one, three, five, seven or even 10 years, depending on the terms of the loan. Generally, the shorter the adjustment period, the lower the initial interest rate.
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Benefits
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Refinancing a mortgage can result in a lower interest rate, which can therefore result in a lower payment and less interest paid out over the length of the mortgage. A mortgage can also be refinanced for a shorter time, resulting in less interest paid.
There is also a tax advantage to refinancing a mortgage in order to pay off other debts such as car loans or credit card debt. Mortgage interest is generally tax deductible while interest paid on other forms of debt often is not.
Considerations
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Questions to ask when refinancing include,"What are the costs of refinancing?" and "Will I stay in this home long enough to recover those costs?" Borrowers can calculate how long it will take to recover costs by dividing the total costs of refinancing by the amount saved each month with the new, lower mortgage payment.
Also, if the mortgage amount is 80 percent or more of the value of the house, most lenders will require borrowers to purchase private mortgage insurance which will result in a higher monthly payment.
Warning
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Borrowers who refinance in order to pay off other debt, such as credit card debt, should take care not to run the debts back up.
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