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To Refinance or Not to Refinance?

By Jim Hirschman Published 10/19/2007 | Finance

Refinancing a mortgage has become the financial flavor of the month; it seems that everyone is doing it. Here are some of the common reasons why homeowners renew their mortgage:

  • With increased credit spending, refinancing can give you the option of a lower interest rate and increased cash flow.
  • It allows you to draw from your home equity for home improvements or other large expenditures.
  • To take advantage of lower interest rates or to change the type of mortgage you have (variable to fixed).

Generally, it's worth refinancing if you can reduce your overall costs including the additional costs resulting from refinancing. There are, however, a few other points to consider.

Will you be in your current home for longer than two years? Generally, initial start up costs of refinancing should be recouped within two years, but you'll need to do the math for your situation. For example, if you can save 100 a month on your mortgage payment, but the cost of refinancing is 2500, then it will take you 25 months to break even. Remaining in the home longer than it will take you to pay off these costs, makes sense, leaving before two years, does not.

If you will be remaining in your home for only a short time, it may make sense to get a variable rate, short term mortgage. Seeking out a long term mortgage with a low fixed rate makes sense if you plan to be there for awhile.

What is the bottom line cost of the refinance? Any bank or broker should provide an estimate of final costs; make sure to watch for the up front fees that are due upon closing as opposed to the fees that get absorbed into the loan amount. Additional fees may include:

  • Application fee between 250 and 350
  • Origination fee (typically one percent of the loan amount)
  • Title search
  • Title insurance
  • Appraisal (if it's been awhile since your last home appraisal, often you can negotiate with the lender to pay for this)

Renewing your title insurance. You may be required to renew or take out additional title insurance; enquire into the possibility of a discounted rate.

Are you refinancing to reduce those credit cards? Reducing that 16% interest rate by refinancing can be a smart move, but take measures to ensure that debt does not reappear by destroying the cards or lowering your spending limits.

Refinancing has its benefits, but do your homework before you sign on the dotted line. Try doing an online search for "refinance calculator", and you'll find a number of tools to help you weigh the cost of the new mortgage against the savings. Don't forget, renewing a mortgage these days has become pretty competitive, shop around for the best interest rate.

For sound, professional advice, contact Jim Hirschman Realty in the Sarasota real estate market. Make sure to check out the Longboat Key real estate listings in this unique and scenic area.