Why should I refinance and when does it pay to do so?

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There are several reasons to refinance your home:

  • To lower the interest rate on your mortgage, reducing your monthly payments and overall cost;
  • To reduce the term or length of your loan, doing so can save you thousands of dollars in interest;
  • To provide a means of consolidating your debt.

All of these are excellent reasons to pursue refinancing, but several issues should be considered first.

Refinancing is similar to the process you encountered when you closed on your first mortgage. It requires an application, credit check, new survey and title search, as well as an appraisal and inspection fees. As you know, this process can be quite lengthy and expensive.

As a rule of thumb, it pays to refinance if you can get an interest rate at least two percentage points lower than what you are currently paying. However, every situation is different. Some lenders* are offering reduced fees or no points. Asking yourself a few questions may help you determine if you can save money:

  • How much can I lower my current monthly payment?
  • How long do I plan to stay in the house after I refinance?
  • How much will I pay in refinancing costs?

Next, figure out what you still owe on the house, how much you're paying each month, and how much you initially paid for the house. Itemize all the expenses of the refinance and estimate your new monthly payments. With this, you can figure out where you break even and when you begin saving money.

Use the Mortgage Refinancing Worksheet below as a guide to help you through this process.

Mortgage Refinancing Worksheet

Use this worksheet as a guide to help you:

  • estimate a refinanced mortgage payment amount (Step 1) and to
  • help you determine if it's worth your while to refinance your existing mortgage (Step 2).

Mortgage Refinancing Worksheet (PDF)
Mortgage Refinancing Worksheet (HTML version)

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