By Doug Whiteman, MoneyWise
Interest rates have been creeping higher, but they're still pretty low when you look at their history. Meanwhile, housing prices -- which were crashing 10 years ago -- have been on a steady climb.
Refinancing could be an excellent way to lower your mortgage rate and cut your monthly payment, or tap into your home's rising value. But it's not always the right choice.
Ask yourself these questions before you go the refi route.Ask yourself these questions before you go the refi route.
Can you dump your current loan?
Your current mortgage loan may carry a penalty if you pay it off early, maybe during the first few years.
These prepayment penalties aren't common, though you might find them with interest-only mortgages and other unconventional loans. The cost could make you decide quickly against a refinance.
Also, some local government grant programs, such as for fixer-uppers or first-time homebuyers, carry special terms that can make refinacing difficult.
You might have to jump through lots of legal hoops. The goal is to prevent house flippers from using the grants to buy properties that they intend to resell quickly.
Read your loan documents carefully to find out if you have a prepayment penalty or other refi restrictions.
Would the lower rate really save you money?
When you refinance to take advantage of a lower interest rate, you could cut your monthly payment — but wind up spending way more over the long run.
If you have a 30-year mortgage and have made payments for 15 years, refinancing into a new 30-year mortgage would saddle you with tens, maybe hundreds of thousands of dollars in additional interest charges if you stick with the new loan for its entire term.
Closing costs are another consideration to balance against a lower rate.
If you save $100 a month in interest but the refinance costs you $5,000 at the closing table, it will take over four years to recoup that expense with the money you've saved.
Also, be cautious of refinancing to use some of your increased home equity to pay off debt. If have as much trouble with the cash-out refi as you did with the other debt, you could wind up losing your house.
The bottom line
A mortgage refinance can provide savings and financial flexibility to homeowners. Proceed with caution, be informed of the new loan's terms, and take a close look at your existing loan so you understand the true cost of a refi.
