Thinking of refinancing your mortgage? Since Rates are at 30 year lows! It's a good idea to get pre-approved for a loan if you're seriously thinking about refinancing your home. Once you're pre-approved, you'll have a commitment from a lender. While it is important to analyze the savings versus the costs, it is equally important to take into account the history and future of your home loan.

• If you plan to keep your home for 1 to 3 years, you may want to consider a No Cost loan.
• If you plan to keep the home for 7 - 20 years, you may want to pay extra points to get a lower interest rate.
• If your property will be a rental, cash flow and the lowest possible payment may be your concern which you may want to pay extra points.
• If you have already been paying on your 30 year loan for 10 years, a new 15 or 20 year loan might be the best option.

Break Even Point

To compare the savings to the cost, divide the total cost of the refinance by your monthly savings to determine how many months it will take to "break-even". If you plan to keep the loan longer than the break-even point, it probably makes sense to refinance. Example: Mike is saving $200/month by refinancing. The new loan cost him $4,800. It will take 24 ($4,800/$200) monthly payments for Mike to "Break Even" on the cost of the loan. If Mike plans to stay in his home for more than 2 years, it makes sense for him to refinance.

It may make sense to finance the costs into the new loan. Sometimes referred to as a No Cost Loan (No Out of Pocket expenses), including the cost in the new loan uses the equity in your home, not you bank account, to pay the loan costs. You may choose a loan with lender/broker paid costs. With a "No Cost" Loan the break-even point is immediate since you are reducing your monthly payment without paying any closing costs or increasing your current loan balance.

Reasons To Refinance Include:

Lower Your Monthly Mortgage Payment

Take Cash Out for Debt Consolidation or Home Improvements

Switch From an Adjustable Rate Mortgage (ARM) to a Fixed Rate Loan

No Closing/Settlement Cost Loan

Shorten the Term of Your Loan (ie. 30 years to 15 years)

Payoff a High Interest Rate 2^nd Loan

Eliminate Mortgage Insurance (MI)

Switch from an Adjustable Rate Mortgage (ARM) to a Fixed Rate Loan

Unless you have been paying on your ARM loan for several years, the current fixed interest rates may be slightly higher than the current interest rate on your ARM. Ask yourself if the security of a fixed rate is worth a slightly higher payment. If you think interest rates aren�t going up for awhile, you may want to wait until you next adjustment. If the fixed interest rates are lower than your current ARM interest rate, ask yourself where you might be in 2 years? 5 Years? Evaluate your Break Even Point. If your Break Even Point is a long period, ask yourself if the security of a fixed rate is worth the cost?

No Closing/Settlement Cost Loan

With a true No Cost Loan, all of your Non-Recurring closing costs are paid by the lender/broker. They are NOT added to your loan as with a No "Out of Pocket" Cost loan. No Cost Loans are great if you have a high interest rate and are planning to sell or refinance again within the next 2 or 3 years. You may want to refinance for even a small drop in your interest rate. Since the loan has no costs, any drop in your payment is money in your pocket. If you plan to keep your loan for more than about 4 years, you should consider paying your own closing costs. By paying your own closing costs, you will be able to get a lower interest rate and payment.

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Shorten the Term of Your Home Loan (ie. 30 years to 15 years)

If you have a 2^nd mortgage and some equity in your home, it may benefit you to refinance and combine both loans into one loan. In addition to the convenience of writing one check each month, the payment on the new loan is likely to be less than the combined payments of the first and the second. For example, Scott had a First Loan at 7% paying $900/month and a Second Loan at 14% paying $250/month. His combined monthly payment was $1,150. After he refinanced both loans into a new First Loan at 7.25% his new payment was $1,050 saving him $100/month

Eliminate Mortgage Insurance (MI)

If you purchased your home with less than a 20% down payment, you are probably paying Mortgage Insurance. If the value of your home has increased and/or your loan balance has decreased over the last few years, you may be able to avoid paying Mortgage Insurance. Even if you do not get a lower interest rate, it may benefit you to remove the Mortgage Insurance by refinancing. After evaluating your Break Even Point, the savings of no longer paying Mortgage Insurance may justify the cost of refinancing. Many borrowers who have less than 20% equity in their homes, choose a combination first and second mortgage (referred to as a piggyback mortgage) to avoid mortgage insurance (MI). The most common method of financing without MI is an 80-10-10 (an 80% 1st mortgage, 10% 2nd mortgage with 10% equity). Also available is an 80-15-5 (requiring an 80% 1st mortgage, 15% 2nd mortgage with 5% equity).

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