An old rule of thumb teaches that if rates drop by two percentage points,
then it's time to refinance your mortgage. However, in today's market, if
you're planning to stay in your home for a while, and you find a good deal
on refinancing costs, it may be worthwhile to refinance with only a 1
percent lower rate.
Refinancing involves many of the
same steps and the same types of closing costs you encountered when
obtaining a mortgage the first time around.
Tip
When refinancing a loan, the lender is not required to give you a
"good faith estimate" of closing costs. So be sure to request
one before deciding whether it pays to refinance.
Besides a lower interest rate,
other reasons for refinancing include converting from an adjustable to a
fixed-rate mortgage, or wanting to build equity sooner by converting to a
shorter-term mortgage. Some homeowners may want to draw on the equity they
have already built to get cash for a major expense, such as their
children's education.
Some lenders offer
"no-cost" refinancing, but this usually involves a higher
interest rate.
In order to refinance, your home
must have enough value to justify a new loan. Many people who bought homes
at peak prices in the late '80s were disappointed to learn that they could
not refinance their homes when mortgage rates dropped in the early '90s,
because the value of their homes fell and they had little or no equity in
their property. To qualify for a lower-rate mortgage, they would have to
make a new down payment on the home in which they're already living.
Does it Really Pay?
To figure out whether it pays to refinance, answer a few questions and do
some arithmetic:
