Refinancing 

Refinancing usually allows home owners to reduce monthly payments or consolidate debt.  Changes in financial circumstances that may cause the difficulty to meet the current monthly payments will be solved by refinancing for a longer term to reduce the payment.  On the other hand, shortening the term of the will afford the home owner savings due to the reduction of interest costs.  Consolidating debt with refinancing, usually allows the home owner a lower overall monthly payment and a greater tax benefit.

With shortened term, the will be paid faster and the build up of equity will be accelerated.  A new with bigger principal will turn home equity into cash.  This is otherwise known as the cash-out refinancing.  The cash realized will allow the borrower to do home improvements or to pay-out large expenditures.  Another reason for refinancing is to take advantage of lowered interest rates.  However, the rule of thumb to consider is that if the decrease in the interest rate is more than 1/2% to 5/8 % as compared to the current rate, then refinancing may be a viable decision.

Otherwise, the cost of refinancing will not be covered by the savings that will be realized from the lowered interest rates.  Another reason for refinancing is to reduce the risk of interest rate fluctuation by changing from variable to fixed interest rate mortgage.

Refinancing is a good idea only if you plan to stay in your home for more than two years.  The cost of refinancing can normally be recouped within two years.  If you are planning to move in a year, you may not realize the savings you are aiming for.  It is always a good idea to determine the time it will take to recoup your closing cost, also known as the breakeven point.

The borrower may opt for refinancing to do away with the 16% interest rates of credit cards.  However, he/she should ensure that this option will not cause debt to mount up and destroy his/her financial stability.

The viability of refinancing can be influenced by the prepayment penalty.  Many mortgages impose penalty for early payments.  The amount of penalty varies but usually it is a percentage of the balance or the equivalent of interest payments for several months.

The broker should give you a Good Faith Estimate of the amount of necessary for closing cost.  You may be required to shell out $250 to $350 for the application fee; an origination fee of about 1% of the amount of the loan; prepaid items, appraisal and title fees.  All these closing costs could roughly add up to thousands of dollars.

Refinancing does have advantages as well as disadvantages.  It is important to shop for the best lender who could give the lowest interest rate and closing cost.  A financial tool such as the refinance calculator is available online.  These tools will help the potential refinance borrower to make his decision of whether to refinance or not.  After all, refinancing is an important decision…one that does not have a money back guarantee.