Is the Time Right for You to Refinance?

“Rates can’t go lower” – so advertisements from mortgage companies have been claiming for years. But it’s possible that now, it’s more true than ever. According to research done by Freddie Mac, the average rate on a 30-year mortgage in the U.S. dropped below 4% for the first time ever in 2011. Rates on shorter-term, 15-year mortgages are even lower.

For some, this may create a great opportunity to refinance your mortgage, but doing so often isn’t the best decision financially for families in certain circumstances. Here are four things to consider before you make any decisions:

1. How much equity do you have?

Refinancing may be a priority for homeowners with disadvantageous loan terms or who owe more on their home than it is worth. But these situations can make it difficult to qualify for refinancing. Your first step should be to consult with your mortgage company about whether arrangements can be made to structure a different financing package for your home.

If you do have higher costs of equity release in your home, you have more flexibility. In cases where the amount you owe on the mortgage is significantly less than the value of the home, it’s possible to structure a payment that may be dramatically lower than your current monthly mortgage expense. It’s a good idea to use an equity release calculator to compute for the amount of equity you can get. If the amount of equity is not much different than the current value, the payment will be closer to what you already have, but would likely be an improvement due to the recent decline in interest rates.

2. Why do you want to refinance?

Locking in an historically low rate can be appealing, but is it a fit for you? If you are within a few years of paying off your mortgage, it may not make sense for you to re-start with another 15-year or 30-year mortgage. If you’re focused on reducing your total debt, financing your home for an extended period of time may not be a favorable move.

Many who do have significant equity in their home refinance to “cash out” some of that equity for other purposes. But it can be risky; this strategy backfired on many homeowners when housing prices crashed in recent years. Those who took out too much cash were suddenly “underwater,” owing more on their house than it was worth when its value declined. If the rationale for refinancing is to access cash, be sure it is for a worthwhile purpose like paying down more expensive debts such as credit card balances or financing an improvement on your home that could boost its value.

3. Are you in a position to refinance?

If you have run into credit problems due to the sluggish economy, refinancing may not be as easy as it used to be. Households need to have a sufficient credit score — usually 700 or higher — to be able to qualify for a conventional mortgage.

Employment status could be another factor. A number of Americans, some involuntarily, have recently left the workforce and have started their own businesses. If you don’t have an established record of income yet as a business owner, it might be a

difficult time to obtain a new mortgage. Ask about this upfront when you contact your mortgage company to make sure it’s worthwhile for you to pursue the mortgage application process.

4. Determine the terms that suit your needs

If everything else works out and refinancing seems to be a good choice, the final question is whether to opt for a 15-year or 30-year mortgage. An adjustable-rate mortgage is also an option, but since the terms of those loans are subject to change, it may not make sense given the historically low rates that exist today.

If your primary goal is the lowest possible payment, a 30-year loan makes sense. If you are trying to focus on reducing debt and accumulating wealth, a shorter-term loan may make more sense; the total interest paid on a 15-year loan will be significantly lower than with a 30-year mortgage. While monthly payments will be higher, a 15-year loan offers more long-term advantages for these homeowners since the financial obligation of a mortgage will no longer exist after 15 years, allowing you to concentrate on retirement or education savings.

If you ultimately decide to refinance, be sure to compare costs of different lenders. The break even point on the cost of the loan (the number of years you need to keep the mortgage before the costs of obtaining a new loan are overcome) is a critical measure of whether refinancing is a worthwhile move for you.  ©

[blockquote class=blue]Andrew Buscetto is a financial advisor with Mazzetti, Buscetto and Associates, a financial advisory practice of Ameriprise Financial Services, Inc., 427 Bedford Road, Suite 390 Pleasantville, NY. Reach him at or 914-747-0810.[/blockquote]


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