Questions to Answer Before You Refinance a Mortgage

Refinancing a mortgage can be a great way to save money, but if you are not careful then you might find that your refinanced mortgage loan will actually end up costing you more than your original loan did. You should make sure that you do not rush into refinancing a mortgage loan, taking the time to consider whether you would be better served by keeping your current loan or refinancing with a new loan. In order to help you to decide whether refinancing is right for you, ask yourself the following questions before you refinance.

Can I get a better interest rate?

Before you refinance, always take the time to check the interest rate you will have to pay. Though many commercials and advertisements might say that it is a great time to refinance, you will find that more often than not the same advertisements will appear regardless of whether rates are low or high. Take the time to shop around before you refinance, and collect rate quotes that you can compare to your current mortgage rate. That way, you can make sure you will be paying less for your new loan than you are for the mortgage loan you currently have. If you find an exceptional deal on an interest rate then you can end up saving thousands of dollars on your mortgage over the course of repayment. Consider and weigh both the total of payments over the long term as well as any savings you may receive on the monthly payment. Sometimes a lower payment now means a higher cost overall, but not always.

How will this affect my monthly payment?

Another major consideration in regards to whether you should refinance is how refinancing will affect your monthly mortgage payment. While many refinance loans will lower your monthly payment at least slightly, it is possible to actually increase your payment with a refinance if you are not careful. If the loan terms or interest rate are not advantageous then you also might find that the amount of the decrease in your mortgage payment is not significant enough to justify abandoning your old interest rate and terms. If you are having trouble making your current payments, though, then you might be able to find a refinance loan that will reduce the amount you have to pay enough that your budget no longer has to suffer.

Will the terms of the loan stay the same?

If you have flexible loan terms on your mortgage, you need to be careful and make sure that you do not end up getting terms for your new loan that are much more restrictive such as an early payoff penalty. Be sure to read through the proposed terms for any new refinance loan before you agree to anything, making sure that there are not any provisions in it that will make the loan much more difficult to repay than your current mortgage loan like a balloon payment at the end of the term. Keep in mind that the reverse may be true as well; if you currently have strict terms to your mortgage you may be able to refinance with a loan that is much more flexible. Compare your current terms to the terms of any refinance loan that you may be considering to see which offers you the greatest advantage over the course of your loan repayment.

How long do I have to repay the refinanced loan?

Depending on the type of mortgage loan that you have and the amount that remains to be paid on it, you may be able to either lengthen or shorten the repayment term of your mortgage with a refinanced loan. Make sure that any change in the amount of time that you have to pay off your loan works to your advantage. While it can be useful to add several more years to a refinanced balloon mortgage or interest-only loan, adding another 10 years to a 30-year mortgage can make the repayment time stretch on for what seems like forever if you are not paying more than the minimum payment. On the other hand, if you have excellent credit and 20 years left on your current 30-year mortgage, you may be able to refinance to a 15-year mortgage with a much lower interest rate, keeping your payments essentially the same but paying off the balance in an accelerated time period.

What will the refinanced loan cost me overall?

Whenever you consider refinancing your mortgage loan, it is always important to look at the bottom line. The whole point of refinancing is adjusting the loan terms so that they are more in your favor than the current terms - if adding another five years to your mortgage is going to add a significant amount of added interest fees to what you have to pay then it is not worth it. Make sure that there is a definite advantage to your refinanced loan over your standard mortgage loan, or else wait until the time is better to refinance and stick with your current loan for now.

Shawn Thomas is a freelance writer who writes about economic issues and financial products pertaining to the mortgage industry such an adjustable rate mortgage or the lowest mortgage rate.