advice and guidance

While refinancing is a great tool that can help you adapt to your changing financial needs, a little knowledge will take you a long way. Don't just follow a pop-up ad on your Web browser that claims that rates have hit an all-time low. Although the days of the historically low rates are gone, rates are still good — the cost of borrowing money remains low, and adjusting and managing your debt and interest rates can still play a major role in making your life easier. Going into a refinance transaction with some knowledge about your goals and the process itself will save you many headaches along the way.

Advantages and Disadvantages of Refinancing

Some of the advantages of refinancing are obvious. You may be able to lower your monthly payment, get a better interest rate, shorten or lengthen the term of your loan, get cash back, or consolidate debt, to name a few. But there are some obvious disadvantages as well. The most glaring disadvantage — and there's no way to sugarcoat this — is the cost of refinancing. It costs money to borrow money.

Lenders will charge you their normal fees for processing and underwriting the loan. These lender's fees will vary from lender to lender, and will include the costs of underwriting, processing, tax certificates, flood certificates, document preparation, and administrative fees.

There are also fees that the lender has no control over. Since the title will need to be updated, the title company or lawyers fees will need to be paid along with a title premium. The house will most likely need to be appraised, which means an appraiser's fee. And sometimes an updated survey must be purchased. To get the best rate, you will need to pay these closing costs by either bringing money to the closing table or — the most popular way — rolling the costs back into the loan.

What's Your Break-Even Point?

To determine whether you should refinance to lower the rate, you need to know the answers to these two questions:

How long will you keep this mortgage?
How much will it cost you to refinance?

Since you will be paying money and probably rolling the cost back into the new loan, it's important to know when you will break even by refinancing. In other words, how many months or years will it take you to recoup the money you spend to refinance the mortgage? If it costs you $3,000 to refinance, and you are saving $100 a month, you will break even in 30 months, or 2.5 years. If you plan to keep the mortgage for at least another five to seven years, then refinancing would probably be to your advantage. A general suggestion that loan officers use runs as follows: Seriously consider refinancing to lower the rate if you can drop your current interest rate by at least 1 percent (one point) and pay the costs. Or, consider a no-cost refinance.

The No-Cost Refinance

Another way to lower the payment is to ask your lender about a "no cost" refinance. Yes, there really is such a thing — but no-cost refinancing means it doesn't cost you anything. Sometimes lenders can offer a no-cost loan at a higher premium, which means that they charge you a higher rate than if you paid the closing costs yourself. It might be worth the trouble to lower your rate by 0.25 percent to 0.5 percent if you didn't have to pay anything for it, but be careful — always make sure that you're getting a true no-cost refinance. These no-cost loans were more readily available during the historic low rates of a couple of years ago, but it doesn't hurt to ask.

All of these pros and cons should be considered in the timing of the refinance. When you understand your options, you're ready to contact a qualified mortgage professional and get his or her thoughts on whether refinancing is right for you. A professional may have additional information that will influence your decision.

Source: eSchool - Mortgage and Home Buying