Home Finance- Is a Refi Right For You

Home Finance: Is a Refi Right for You?

Refinancing your mortgage can help you save money - but find out first whether it's the right financial move for you.

When interest rates are low, millions of Americans choose to refinance their homes. Why? Refinancing can help you reduce your mortgage payments - but it doesn't make sense in every situation. Before undertaking a mortgage refinance, its important to explore your options to determine whether refinancing is right for you.

A lower interest rate sounds great, right? It certainly does, but only if you're going to stay in your home long enough to break even. You see, there are fees in involved in refinancing your home, so be sure to determine the amount of time it will take for your overall savings to compensate for the cost of the refinancing. You should also study the terms on your current mortgage to find out whether you'll be assessed a penalty for paying off the loan early.

If you're considering a home refinance, make sure you really think it through first. Financing to reduce debt is a good move, but if you're refinancing in order to borrow more for a car, vacation, etc., that could be an unwise financial move. You should also keep in mind that when you refinance your mortgage, you're starting over again with another 30 year loan - and could actually be paying more interest in the long run.

When looking at a refinance, don't choose a mortgage based solely on its annual percentage rate (APR). There are other important factors to consider, such as:

Mortgage Term: This is the amount of time it will take you to pay off the loan amount plus interest. Short-term mortgages usually have lower interest rates than long-term mortgages, but they have higher monthly payments attached. However, you'll realize significantly reduced interest costs over time.

Interest Rate: Does the loan have a fixed or variable interest rate? Loans with fixed interest rates don't change, while adjustable rate mortgages (ARMs) have variable interest rates. That means that interest rates can change after a predetermined amount of time, and can cause your monthly payment to rise considerably.

Points: Points (sometimes called "origination fees" or "discount fees") are fees that you pay to a lender or broker when you close the deal. There are "no-cost" or "zero point" mortgages that do not carry this up-front cost, but it is sometimes more expensive as the lender may charge a higher interest rate instead. You'll want to determine whether the savings from a lower interest rate justify the cost of paying points.

There are times when it makes sense to refinance your mortgage, but be sure to have clear goals and do your research to determine if refinancing is really right for you.