Should you refinance your mortgage?

Your home represents one of your biggest investments. It also represents your biggest monthly expense. Your mortgage payment is more flexible than you realize. You aren't stuck at the interest rate of your original loan until payoff is complete. You can refinance your home mortgage for any number of reasons.

Choosing to refinance your home mortgage loan depends on how long you plan to live in your home. If you're moving in a year, it's really not worth it. However, if you're not moving, refinancing your mortgage to a lower interest rate can lower your payments considerably every month. It's important to make sure that the cost of refinancing is worth it.

Reasons to refinance

- Convert adjustable rate mortgage to fixed rate mortgage change
- Lower mortgage interest rate

- Switch to shorter loan term
- Save money
- Debt consolidation
- Purchase big ticket items (college, car, home renovations)

Should you refinance?

Many people still feel that interest rates should be 2 points lower than your current rate to really make refinancing worth the expense. This isn't necessarily true. Sometimes even 1 point is enough to make a sizable difference in your monthly payment. Compare the savings per month between your old payment and your proposed new payment. Then, find out the closing costs for your proposed refinance. Divide your total closing costs by your monthly payment. This figure represents the number of months you will be required to make your new payment to break even on your closing costs. Refinancing your mortgage is not worth the expense if you are planning to move during this time. Remember, you might also choose to roll your new loan's closing costs into the loan.

Primary Mortgage Insurance (PMI)

When you purchased your first home, was your down payment 20 percent of the home's sale price? If your down payment was lower than 20 percent, then you carry PMI. Over time, your home gains equity that not only makes your house worth more but it also negates the requirement for PMI. If your mortgage is 80 percent or less of your home's value, you longer need to carry this insurance. When you refinance, make sure this issue is addressed. Very likely, you'll be able to drop this expense and lower your mortgage payment.

Where to refinance

Contact your mortgage company first to check out their refinancing offers. They have your business and would like to keep it. However, you shouldn't blindly trust them to have the best offer. Shop around on the Internet. Compare different bank interest rates, use mortgage calculators, and do your research. Also, carefully watch closing costs. Some banks offer really tasty interest rates and then slap you with unreasonable fees. Other banks offer no fees at all but charge a higher interest rate.

It really isn't necessary to pay points since mortgage interest rates are so competitive. Points are basically paid to buy down your interest rate. Each point costs 1 percent of the mortgage value. The more points you pay the lower your mortgage rate. Points are wholly deductible on your first mortgage but only a portion is deductible on refinances.

Your credit report

You may think you don't need to worry about your credit since you already have a home. But you do. Make sure your credit is as clean as possible before attempting to refinance. Like any other loan or form of credit, mortgage companies can charge higher interest rates for higher risk loans. You will never be able to get the lowest available rates if you have bad credit. If you are attempting a bad credit mortgage refinance, make every attempt to clean up your credit.

What are reasonable mortgage fees?

When comparing loan-closing costs, it's very important to know what is reasonable. The mortgage company will request an application fee (usually $250-400) and a home appraisal fee ($300). It's typical to pay fees such as title search and title insurance so the mortgage company can be sure you are the real holder of the property. Other lender fees include origination fees (1 percent of the amount of the loan) and attorney fees which cover the cost of the mortgage company's overhead costs to approve, process, and finalize your loan.