Refinancing Basics

• Refinancing a mortgage simply means acquiring a new mortgage loan that takes the place of your existing mortgage. This is a common financial maneuver for homeowners seeking a lower interest rate or a reduced monthly mortgage payment. Lowering your interest rate just a fraction of a percentage can lower your mortgage payment amount and significantly reduce your total interest paid over the life of your loan. However, you have to compare the potential savings with the upfront closings costs required to get the new mortgage terms.
  
  

Mortgage Rates

• Mortgage interest rates fluctuate over time with a variety of economic influences. The Federal Reserve uses monetary policy to influence the costs of borrowing. As the Fed sees a need to spark the economy, it often lowers the discount rate it charges lenders, which typically lowers consumer and business loan rates. When the Fed needs to combat inflation, it raises rates. Investments in mortgage-backed securities also impacts loan rates. When the costs of borrowing drop, homeowners that purchased their homes during higher interest-rate periods often try to take advantage of the reduced financing costs.
  
  

Refinancing Considerations

• Making a refinancing decision involves much more than just a lower interest rate consideration. You have to examine the potential savings you would get from a lower rate. Someone with a higher mortgage balance benefits more from a slight reduction in interest rates because they pay more in interest. Along with your potential savings with a lower rate, you have to take into account how long you plan to live in your home and the costs to get the new loan.
  
  

Making a Decision

• Refinance decisions begin with a simple break-even calculation. Bankrate states that the average closing costs on a mortgage were $3,118 in 2008. You need to decide whether you will live in your home long enough to recoup your closing costs from savings on a lower rate. Your lender must give you a good-faith estimate of closing costs at the start of your new loan process. Timing is important as well. Multiple refinances mean significant closing cost investments. If you move too quickly when rates drop by just one-quarter to one-half point, you may see rates drop even more in a few months. Work with a trusted mortgage consultant to calculate your savings and costs and to make a wise decision.