Should you refinance your home?

Below is an excerpt from a recent article focusing on refinancing options. In today's economy, it's important to be aware of your options. We are committed to doing everything we can to help you with questions regarding the real estate market.

"Refinancing into a long-term loan can extend the years in which you make payments and that can increase the amount you ultimately pay for the loan, even if the rate is lower. Even if you decide to refinance, you may not be sure of whether to go fixed or variable, long or short. Should you roll your other debts into your home mortgage?


Here's how to decide whether to refinance, and how to go about it to get the best possible loan for your situation:

• Use an online calculator. It will give you a good idea of how much you'll spend over the life of the loan, and whether the refi makes sense in a strictly dollars and cents way. Check out the calculators at bankrate.com and hsh.com.
• Get several quotes, and beware of extra costs and traps. The points you may be asked to pay to secure your loan are just one cost of a refinancing. You'll also be tapped for a home appraisal and miscellaneous other lender fees. Ask your lender for a good faith estimate of all closing costs. Avoid getting any loan that carries prepayment penalties: these are illegal in some, but not all states and situations. Compare web-based lenders and a local lender or two.Get recommendations from friends for mortgage professionals they have dealt with before.
• Skip the ARM. Rates now are within spitting distance of their historic lows, so why wouldn't you want to lock them in? Some lenders, such as Countrywide, aren't charging any less for adjustable rate loans than they are for fixed rate loans.
• Make your own interest rate prediction about floating rate debt. Home equity lines of credit (HELOC) currently are charging rates as low as 3.5 percent; they are cheaper than regular mortgages now. But that may not last. Borrowers will have to make their best guess in predicting whether they will be able to pay off their HELOCs before rates rise to mortgage-topping levels. If you're looking at a very large balance on a HELOC and are uncertain about when -- if ever -- you will be able to pay it off, consider rolling it into a new mortgage along with your existing loan.
• If you're worried about cash flow, go long. If you're having trouble making your mortgage payment, and are worried about your job and future earnings prospects, consider refinancing into a long-term 30-year fixed-rate loan. That can be a home-saver, as it may lower your monthly payments enough so that you can keep up with them.
  If your finances strengthen, you can make extra payments and burn the loan early.
• If you are nearing retirement, resist the urge to refinance, especially if you'll have to use tax-deferred money to make your monthly payments. For every IRA or 401(k) withdrawal you'll take to make a mortgage payment, you'll also have to withdraw enough extra to cover the income taxes on that withdrawal. That can make your mortgage even more expensive. Use a pre-retirement refinancing only if it will save you significantly in interest over the long term, or if selling your home is part of your retirement plan, and you simply need to lower your payments for a few years.
• Don't use your new mortgage to pay off credit card and car loans. That puts you in the position of paying for that meal or handbag for 30 years. And it puts your house on the line for debt that is now unsecured; or secured only by a car. That's too risky."

For the full article, click here.

Source: Reuters.com