Recs

1

Think Twice Before You Refinance

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

With interest rates still lingering near record lows, the common question facing homeowners remains: Should you refinance your mortgage?

The rough rule of thumb is that if you can get your interest rate lowered by at least one percentage point, it may be a good idea. But even then, it may not be worth it. Before you rush out to the bank for a refi, ask yourself these questions first:

Do you expect to be staying put in your home for at least a few years?
If there's a good chance you'll be moving next year, you may want to skip the refinancing. That's because refinancing costs money. Closing costs typically total 2% to 3% of the loan. If it costs you $3,600 to refinance, and you're saving $100 per month, then it'll take you three years to recoup your closing costs by refinancing.

Is there a prepayment penalty in effect in your current mortgage?
Some loans have such penalties for the first few years of a loan. If so, refinancing may not be worth it. Look into your current loan terms, and if you do end up securing a new loan, make sure it lacks prepayment penalties.

How much equity do you have in your home?
Many homes have fallen in value significantly, with the median national price of a single-family home still down almost 20% since 2007. If you don't have 20% equity in your home, you'll likely be required to purchase private mortgage insurance (PMI), which can wipe out much of the savings you get from refinancing. (If you already pay PMI, this will be less of an issue.)

What's your credit score?
If your score is worse than it was when you originally got your mortgage, you may not qualify for those great low rates you see advertised, which are often reserved only for those with scores of 720 or better. If it has improved, you may find yourself offered rates much better than your current one.

How much of an interest-rate difference is there?
Obviously, the greater the difference, the faster the savings from refinancing will pay for its costs.

Has your income risen or fallen significantly?
On one hand, refinancing into a lower-rate loan can lower your monthly payment considerably. On the other, if you're making more than you did when you first took out your mortgage, you could pay off your mortgage more quickly by getting a loan with a shorter term.

Do you have an adjustable-rate mortgage (ARM)?
If so, refinancing into a fixed-rate loan now, at these historically low rates, can be a smart move.

Are you mainly interested in refinancing so that you can "cash out" some money?
If so, be sure to consider that taking money out to pay off debts, or pay for a kitchen remodel, will mean that you'll probably be paying that money off for 15 or 30 years, with interest. You'll also reduce your equity stake in your home.

Whether or not to refinance can be a more complicated question than many people think. Be sure you assess your situation carefully, and remember that sometimes, not refinancing is the best option.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Motley Fool is Fools writing for Fools.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1332672, ~/Articles/ArticleHandler.aspx, 10/24/2014 4:17:51 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Selena Maranjian
TMFSelena

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

Today's Market

updated 7 hours ago Sponsored by:
DOW 16,677.90 216.58 1.32%
S&P 500 1,950.82 23.71 1.23%
NASD 4,452.79 69.95 1.60%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement